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HOW TO INVEST WHEN 
PRICES ARE RISING 



A Scientific Method of Providing 

for the Increasing Cost 

of Living 




IRVING WISHER 
EDWIN WALTER KEMMERER 
HARRY G. ?ROWN 
WALTER E. CLARK 
J. PEASE NORTON 
MONTGOMERY ROLLINS 
G. LYNN SUMNER 




1912 

G. Lynn Sumner & Company 

Publishers " Securities Review w 

Scranton, Pa. 




Copyright, 1912 
G. Lynn Sumner & Company 



ICI.A330I 



CONTENTS 

CHAPTER PAGE 

I. Introduction 3 

By Irving Fisher, Ph.D., Professor of Eco- 
nomics and Finance, Yale University 

II. Why It Costs You More to Live 13 

By E W. Kemmerer, Professor of Economics 
and Finance, Princeton University 

III. Rising Prices and Investments 35 

By Harry G. Brown, Ph.D., Assistant Pro- 
fessor of Economics, Yale University 

IV. Bonds as an Investment When Prices are 

Rising 55 

By Walter E. Clark, Ph.D., Professor of 
Economics, College of the City of New York 

V. Stocks as an Investment When Prices are 

Rising 77 

By J. Pease Norton, Ph.D., Vice-President 
of the American Association for the Advance- 
ment of Science 

VI. Bonds with a Stock Bonus 105 

By Montgomery Rollins 

VII. Conclusion 125 

By G. Lynn Sumner, Editor "Securities Re- 
view" 



CHAPTER 1 

INTRODUCTION 

BY IRVING FISHER, PH.D. 

Professor of Political Economy, Yale University 



CHAPTER I 
INTRODUCTION 

THE whole world is now ringing with com- 
plaints of the high cost of living. The 
great dominant fact to-day is the rising 
tide of prices, just as a generation ago the great 
dominant fact was the ebbing tide of prices. 
Moreover, whether the tide of prices rises or falls, 
the change has a profound effect on the economic 
ocean and encroaches even on the social and po- 
litical horizons. 

A generation ago the whole world was com- 
plaining of "depression of trade." Then the dis- 
cussion revolved about the under-supply of gold. 
To-day we hear much of the over-supply of gold. 
Then the social discontent led to a new alignment 
of political parties, and to-day similar discontent 
from an opposite cause is again disturbing our 
political conditions. 

The high cost of living is an issue in every land. 
Parties in power are held responsible. Parties 
out of power promise that they will "do something 
to reduce it." The situation is a serious one, for 

3 



4 HOW TO INVEST 

in times of such excitement the public is apt to 
blame the wrong men and things and to demand 
impossible or revolutionary remedies. We need a 
careful, scientific, sane discussion of the subject 
in all its aspects — a discussion in which the whole 
world is represented, because in it the whole world 
is concerned. For this reason it has been suggested 
that there should be called an International Con- 
ference on the High Cost of Living. President 
Taft has recommended that such a Conference 
be called. A Bill for that purpose has passed the 
Senate and will doubtless be considered by the 
House at its next session. 

Meantime economists, financiers, officials and 
the public press are giving much time and thought 
to this all-engrossing subject Much valuable ma- 
terial is gradually accumulating. This book con- 
tains some of this material not elsewhere avail- 
able. It emphasizes the effect of the rising tide 
of prices on investments and investors. 

The Investor's Problem 

The investor is one who makes a present sacri- 
fice in order to gain a future return. If prices 
rise between the present sacrifice and the future 
return, this fact is bound to influence the results. 



WHEN PRICES ARE RISING 5 

If his promised return is a definite sum of money, 
the rise of prices means that the purchasing power 
of this sum will have been curtailed. If his in- 
vestment is arranged in some other terms, he may 
gain. 

In a general way during the recent decade and a 
half of upward prices, it is the bondholder who 
has lost and the stockholder who has gained. 
This is clearly shown in several of the papers 
which constitute this book. We may say roughly 
that the rise in prices has subtly robbed the bond- 
holder for the benefit of the stockholder. This 
is, in a broad use of the term, a gross injustice. 
But it is more. By introducing confusion into 
contracts it makes every contract a speculation. 
The progress of business depends on stability. 
The effort of every business man is to produce 
stable conditions. He wishes a dependable govern- 
ment, security of credit, and uniformity of con- 
ditions under which he does his work. The whole 
business of insurance was built up in order to 
produce a greater degree of certainty. Trade 
Journals and special statistical services have been 
created to enable business men to foresee clearly 
impending changes. Anything which, on the con- 
trary, upsets calculations and introduces insta- 



6 HOW TO INVEST 

bility, uncertainty and obscurity, introduces a 
heavy handicap. 

Where stability has not been possible, business 
men have tried to separate off the risky enter- 
prises so that they may be recognized and treated 
as such and handled by experts who make a par- 
ticular business of dealing in these hazards. Cer- 
tain wholesome customs based on such classifica- 
tions have arisen. For instance, it is agreed gen- 
erally that trustees ought not to invest in specu- 
lative enterprises, the idea being that their bene- 
ficiaries, often widows and orphans, have a right 
to a fixed and certain return on their investment. 
As a matter of fact, however, what investments 
can we find which offer real fixity or certainty 
of income? The trustee has assumed that gilt- 
edged bonds are safe and has preferred such in- 
vestments to stocks, since all stocks involve the 
risks of business. Yet, as every reader of this 
book will clearly see, the man or woman who in- 
vests in bonds is speculating in the general level 
of prices, or the purchasing power of money. 

A Choice Between Risks 

There is not much to choose between the risks 
run by investing in stocks and risks run by in- 



WHEN PEICES AEE EISING 7 

vesting in bonds. The two risks are, it is true, 
of different kinds, one being the risks of particular 
industries, and the other the risks of changes in 
the value of the gold dollar. But they are both 
real risks. It surely ought to be possible to have 
a class of investments in which the funds of 
widows and orphans can be safely put and which 
will insure to them a stable income. 

A servant girl who placed one hundred dollars 
in the savings bank fifteen years ago and who now 
withdraws this with accumulated interest, amount- 
ing to about fifty dollars, will find that with the 
whole amount (one hundred and fifty dollars), 
she can scarcely purchase as much as she could 
have purchased with the original principal fifteen 
years ago. What has she to show for her invest- 
ment and for waiting fifteen long years for her 
return? Nothing whatever, except the original 
principal. True she has 50 per cent, more dol- 
lars, but this does not represent any more value. 
The increase in the number of dollars has barely 
offset the shrinkage in their purchasing power. 
She might as well have bought jewelry or other 
articles fifteen years ago, and held them to the 
present time ; she would then have had the use of 
them for fifteen years and the same value to-day, 



S HOW TO INVEST 

instead of having made the sacrifice of depositing 
her hard-earned savings. 

The same principle applies to the bondholder, 
who, with a scant 4 per cent, on his investment, has 
an income not so real as apparent; for the $40 
which he annually gets on his thousand-dollar 
bond buys progressively less as the years pass by, 
while the thousand dollars of principal, if he ever 
wishes to get it, will have shrunk in the same pro- 
portion. 

The Depreciating Dollar 

We are so accustomed to measure everything in 
money that we often forget that money itself is 
only a measure. It is almost as difficult for an 
ordinary man to think of a dollar as changing 
as it was for the contemporaries of Copernicus 
to understand that the earth moves. It will help 
every man who wishes to think clearly on these 
subjects, if he will express the rising cost of liv- 
ing the other way about, and refer to it as the 
falling of the purchasing power of money. What 
is really happening is that the dollar is changing. 
The dollar to-day is only two-thirds as large in 
actual purchasing power — will go only two-thirds 
as far in satisfying wants — as fifteen years ago. 



WHEN PRICES ARE RISING 9 

The commercial world needs a stable dollar 
as much as it needs stability in any other unit — 
in fact more, for other units are used only in par- 
ticular transactions, but the dollar in practically 
every transaction. We have standardized the yard 
as a unit of length, the pound as a unit of weight, 
the kilowatt as a unit of electricity, and every 
other commercial unit except the unit of purchas- 
ing power, the dollar. 

There was a time when the yard fluctuated, be- 
ing the girth of the chieftain of the tribe. As 
commercial relations increased in importance and 
extended over periods of time, it became neces- 
sary to have a standard yard. Fancy what havoc 
would be wrought if the yard were to-day the girth 
of the President of the United States! Those 
who had contracts to deliver so many yards of cloth 
would now be in great uncertainty if the time for 
delivery were after the next Presidential inaugura- 
tion! They would not know which of three 
girths would then be the yard! And yet we al- 
low the unit of purchasing power to fluctuate 
constantly and have scarcely asked ourselves if it 
is possible to make it stable. 

I have in my "Purchasing Power of Money," 
and elsewhere, tried to show that such stability is 



10 HOW TO INVEST 

not only a necessity of civilization, but is also prac- 
tically attainable. Before, however, we can talk 
in any practical way of securing a stable yard- 
stick of purchasing power, we must understand 
the evils of instability. I know of no clearer state- 
ments of these evils than those to be found in this 
book. I commend it to the serious study of in- 
vestors and all who are interested in the true 
meaning of the "high cost of living." 



CHAPTER II 

WHY IT COSTS YOU MORE 
TO LIVE 

BY EDWIN WALTER KEMMERER, PH.D. 

Professor of Economies and Finance, Princeton University 



11 



CHAPTER II 
Why It Costs You Moee to Live 

MONEY is worth what it will buy. A dol- 
lar in the United States to-day will buy 
on the average approximately as many 
goods as 67 cents would in 1896. In other words, 
our gold standard unit of value upon which we 
have prided ourselves so much has depreciated in 
value 33 per cent, in 15 years. This assertion, if 
true, is of the utmost importance to men making 
investments in bonds and mortgages which yield 
fixed rates of income and at maturity return 
merely the par value of the principal. What, then, 
is the evidence for the assertion that the dollar has 
lost one-third of its value since 1896 ? 

The United States government, through its 
Bureau of Labor, publishes annually price tables 
showing by months the wholesale prices of 257 
important commodities. These prices are col- 
lected from reliable sources all over the country 
and the report upon them is prepared by trained 
men. The prices for each article are reduced to 
percentage figures, the average prices for the 10 
years 1890-1899 being taken as 100. Then the 

13 



14 HOW TO INVEST 

percentage figures, or "index numbers" as they 
are called, for all 257 commodities for each year 
are averaged together, and the resulting composite 
represents the general index number for the year. 
In every year some prices fall and some rise; if 
falling prices preponderate, the general index num- 
ber declines ; if rising prices preponderate, it ad- 
vances. Comparing 1896, the year before the 
recent advance in the cost of living began, with 
1910, and comparing also the 10-year period 1890- 
1899 with 1910, we observe the following results: 

Prices in 1910 as Compared with Prices in 1896 and in 
the Period 1890-1899 



»2 h *5 *§ 

Kind of Commodity §>> |>§2 

I 1.9 £.2.2 

Farm products 20 110.2 64.6 

Foods, etc 57 53.6 28.7 

Cloths and clothing 65 35.5 23.7 

Fuel and lighting 13 20.2 25.4 

Metals and implements 38 37 . 1 28 . 5 

Lumber and building materials.. . . 28 64.0 53.2 

Drugs and chemicals 9 26.3 17.0 

House-furnishing goods 14 18.7 11.6 

Miscellaneous 13 45.6 33.1 

All commodities 257 45.6 31 .6 

Every group of commodities, it will be observed, 
showed a substantial advance during the periods 



WHEN PKICES AEE KISING 15 

studied and the average advance for all 257 com- 
modities since 1896 was 45.6 per cent., or 3.3 per 
cent, a year. A study of 202 of the commodities 
which are readily comparable during the entire 
period shows that the price of 83 out of every 100 
was higher for 1910 than the average for the 
period 1890-1899 ; that the price of 16 was lower ; 
and of one was the same. Only 4 articles out of 
every 100 decreased 25 per cent, or more, while 
49 increased 25 per cent, or more. 

If we turn from the index numbers of the Bu- 
reau of Labor to those of Bradstreet (covering 96 
commodities), and of Dun (as supplemented by 
the Gibson index numbers), we find substantially 
the same story. The Bradstreet index numbers 
increased from 1896 to January 1, 1912, 51 per 
cent, or 3.2 per cent, a year; while the Dun- 
Gibson index numbers increased from 1896 to 
February 19, 1910, by 56 per cent., or 4 per cent. 
a year. 

The evidence, therefore, points strongly to an 
advance in prices since 1896, averaging for all 
classes of commodities something like 50 per cent. ; 
or, as stated above, it shows that the value of a 
dollar to-day is approximately the same as the 
value of 67 cents a decade and a half ago. 



16 HOW TO INVEST 

Loaning Money at a Loss 

The significance of this fact to the investor is 
evident. If a man bought at $1,000 a 5 per cent, 
bond January 1, 1896, maturing January 1, 1912, 
he bought a secured right to draw $50 a year for 
16 years, and to receive back his principal at the 
end of that period. On the average his $50-a-year 
interest declined in its purchasing power about 
3 per cent, a year, and when the bond matured 
the $1,000 principal which was repaid was equiv- 
alent in real purchasing power to only 667 of 
the dollars which he originally paid for the 
bond. 

If the purchasing power of the dollar in a given 
year depreciates more than the rate of interest 
realized upon the investment, obviously the rate 
of real interest becomes negative, that is, the 
creditor actually pays the debtor for borrowing 
and using his money. In several years of the 
period (1896-1912) negative interest prevailed 
upon most bond and mortgage loans. For example, 
the purchasing power of the dollar declined about 
8.2 per cent in 1899, 8 per cent, in 1900, and 
5.4 per cent, in 1906. 

The losses to investors resulting from the depre- 
ciation of money are in some degree compensated 



WHEN PRICES AEE RISING 17 

by a tendency for interest rates to advance during 
periods of continually rising prices. Professor 
Irving Fisher in his well-known book, The Bate 
of Interest, develops this point at length. Rising 
prices stimulate investments, make business for 
the time being more active, and consequently lead 
to an increasing demand for capital and resulting 
higher interest rates. The adjustment to higher 
interest rates, however, in the case of bonds and 
mortgages can ordinarily be made only upon the 
dates when the obligations mature, and when new 
contracts are being signed. Furthermore, in the 
interim the higher market rates of interest force 
down the prices of bonds whose rates of interest 
are fixed at the old and lower leveL At best, 
therefore, the compensation for depreciation of 
principal, which the creditor receives in the form 
of advancing rates of interest, is only partial, and 
is slow of realization. 

Will Prices Continue to Rise ? 

A knowledge of the extent to which the dollar 
has depreciated in the past is of historical interest 
to the investor, but his primary concern as a 
business man is the question whether it will con- 
tinue to depreciate in the future and, if so, how 



18 HOW TO INVEST 

rapidly. The first step in any attempt to answer 
this question is an inquiry as to the chief cause 
or causes of the dollar's recent depreciation. It 
is with such an inquiry that the remainder of 
this article is concerned. 

In making such an inquiry three rather elemen- 
tary facts must be kept in mind. 

First. Each commodity is subject to its own 
peculiar conditions of production and marketing 
and its price reflects these conditions, as well as 
the more general conditions relating to money 
and credit. Our problem is not a study of the 
prices of any individual commodity or group of 
commodities, but a study of the general price level 
of all classes of commodities. To explain why 
the prices of a number of individual commodities 
rise (while a number of others fall) is no more 
an explanation of a rising price level than is an 
explanation of the crests and troughs of waves an 
explanation of the rising level of a lake. 

Second. The chief cause or causes of the rise 
in the general price level since 1896 are to be 
found in forces which were either absent or rela- 
tively ineffective during the long period extending 
from 1873 to 1896 during which the general price 
level in the United States declined about 39 per 



WHEN PEICES AEE EISING 19 

cent, and that of England about 45 per cent. 
(See chart, page 25.) 

Third. The chief cause or causes are presum- 
ably world-wide in their operation, for a rise in 
general prices during recent years has been found 
in every important gold-standard country of the 
world. The extent of this rise since 1896 in eight 
important countries is shown in the following 
table: 

Extent to which General Prices in Leading Countries 
op the World were Higher in 1910 than in 1896 

Belgium Waxweiler 27 

Canada Coates 35 

England Sauerbeck 28 l 

France R£forme Economique 31 2 

Germany Schmitz-Hooker 42 3 

India Atkinson 37 4 

Italy Necco-Export Prices 21 5 

United States Bureau of Labor 46 

Average for all eight countries 33 

1. If September, 1911, were compared instead of the year 
1910 the increase would have been 32 per cent. 

2. If September, 1911, were compared instead of the year 
1910 the increase would have been 40 per cent. 

3. If September, 1911, were compared instead of the year 
1910 the increase would have been 54 per cent. 

4. Comparison is for the year 1908, the index numbers for 
later years not being available. 

5. Comparison is for the year 1909, the index numbers for 
1910 not being available. 

A reference to the table will show that while 



20 HOW TO INVEST 

the rise has been greatest in the United States, it 
has been very substantial in all the countries, and 
nearly as great for Germany, India, and Canada 
as for the United States. The average increase 
for the eight countries was about three-fourths of 
that for the United States. 

Coming now to a brief consideration of some of 
the principal alleged causes, we may note the fol- 
lowing: Trusts, tariff, trade unions, exhaustion of 
natural resources, increased gold production and 
improved credit facilities. 

Trusts 

The period in question has been one in which 
many trusts have been organized and in which 
monopoly power has been greatly extended. Trusts 
are in business for profit, and despite the fact that 
they often can produce more cheaply than smaller 
concerns, they frequently raise prices, or at least 
maintain them somewhat above what would have 
been competitive rates. 

A study of different commodities, however, re- 
veals the fact that the recent advance in prices is 
by no means limited to trust-produced articles nor 
to "trust-ridden" countries. Many articles ex- 
hibiting the greatest advances in price, such as 



WHEN PKICES ARE RISING 21 

lumber and farm products, are not controlled by 
trusts. 

Furthermore, the rise of prices in India was al- 
most as great as that in the United States. Upon 
this subject we may accept the conclusion arrived 
at by Professor J. W. Jenks, of New York Univer- 
sity, in his special investigation of the influence 
of trusts upon prices for the Massachusetts Com- 
mission on the Cost of Living. He says: "The 
general conclusion must be that the late great gen- 
eral increase in prices cannot be ascribed to the 
trusts, especially the prices that mainly affect the 
cost of living, though they are probably respon- 
sible for a small part of it." 

Tariff 

A second explanation often given is the tariff. 
The tariff may be an important reason for the 
higher level of prices in this country than in 
Europe ; it probably has little weight as an expla- 
nation of the recent rise of prices in the United 
States. The tariff has been high ever since the 
Civil War. It was high during the long period of 
falling prices from 1873 to 1896. It was not ma- 
terially changed from the Dingley Act of 1897 to 
the Aldrich-Payne Act of 1909. Concerning the 



22 HOW TO INVEST 

latter act our foremost scientific authority on the 
tariff, Professor F. W. Taussig, of Harvard Uni- 
versity, says: "In sum," this act "brought no es- 
sential change in our tariff system. . . ." 

Since 1897 prices have been moving upward, 
and the advance is just as evident in articles which 
do not bear effective duties as in those that do. 
The advance, moreover, has taken place in 
countries with a high tariff, like Germany and the 
United States, countries with a low tariff, like 
India, and countries with practically no tariff, like 
England. 

Trade Unions 

The increased cost of living has been attributed 
by many to the exactions of organized labor. 
These exactions may be a cause in the case of some 
goods. When trade unions interfere with the ef- 
ficiency of labor and unreasonably restrict output, 
the result can only be less products, and higher 
prices for particular commodities. The index 
numbers of wages per hour "in the leading wage- 
working occupations of 4,169 establishments in the 
principal manufacturing and mechanical indus- 
tries of the United States," compiled in 1908 by 
the United States Bureau of Labor, showed an 



WHEN PEICES AEE EISING 23 

average increase of wages from 1896 to 1907 of 
29 per cent, as contrasted with the Bureau of 
Labor's index numbers for prices, which showed 
an average increase of 43 per cent. 

Prices and Wages 

The argument that the demands of organized 
labor have been an important cause of the recent 
rise of general prices loses much of its apparent 
weight when one notes that prices have risen much 
more rapidly than wages. It is probably to a very 
considerable extent a case of "putting the cart 
before the horse." One would ba nearer the truth 
in saying that the demands of organized labor for 
higher wages have been stimulated by rising prices 
and by the need of higher wages to maintain ex- 
isting standards of living. Wages normally lag 
behind prices on an upward movement, and the 
demands of trade unions in many cases merely rep- 
resent efforts to "take up the slack." The upward 
movement of prices, moreover, has taken place not 
only in countries like England and the United 
States, where labor organizations are compara- 
tively strong, but also in countries like Germany 
and India, where such organizations are compara- 
tively weak. 



24 HOW TO INVEST 

Exhaustion of Natural Resources 

The exhaustion of natural resources has un- 
questionably been a factor in the upward move- 
ment of general prices. Our population has been 
increasing rapidly and making continually heavier 
demands upon our agricultural, mineral, and 
forest resources. In exploiting these resources we 
have been altogether too careless and wasteful. 
The prices of such basic commodities as foods, 
building materials, fuel, and the like have risen 
more rapidly than those for most other kinds of 
commodities. But the rise in prices has been 
limited by no means to such articles as these. It 
has, moreover, taken place in countries, like 
Germany, where great care has been taken in the 
conservation of natural resources. 

Increased Gold Production 

Another cause, and in my judgment by far the 
most potent one, is the recent phenomenal increase 
in the world's gold production. 

Every price in the United States involves a 
comparison of the value of an article with the 
value of a dollar. When a farmer brings eggs to 
the country store to exchange for sugar he knows 
that the higher the value of sugar, the more eggs 



WHEN PEICES AEE RISING 



25 



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/SO 



-tTey- 



6o/d P/vdvcffo/? 



— — — —Pr/ces to E/ig/a/rat 

■ Pr/ces i/f (/m'teef States 




eo 



i 



500 
480 
460 
440 
420 
400 
380 
360 
340 



MIUUMIili 

Years 



The vertical bars as measured by the figures at the right represent the 
world's average annual gold production for the five or ten-year periods 
ending with the years given at the bottom. The irregular lines represent 
the course of prices in England and the United States. As the English 
and American index numbers are computed from different bases there is 
no significance in the fact that the curve representing English prices is 
almost always lower than that representing prices in the United States. 
The lines merely represent the relative movements from year to year of 
the price levels of tne respective countries. 



26 HOW TO INVEST 

it will require to buy a ten-pound sack ; he knows 
equally well that the lower the value of eggs, the 
more eggs it will require to buy the sugar. He 
knows that both eggs and sugar fluctuate in value 
according to the law of demand and supply. 
When, however, he pays money for goods, he al- 
ways attributes a change in the price of the goods 
to a change in the value of the goods, although it 
may be due to a change in the value of money per 
se. We think of a dollar as a fixed unit of value 
just as a meter is a fixed unit of length, or a kilo- 
gram a fixed unit of weight. But the analogy is 
an incorrect one. 

There is in a $10 gold piece 232.2 grains of 
pure gold. Anybody can take that many grains of 
pure gold to the mints and obtain for it a $10 gold 
piece, and anybody can melt down a new $10 gold 
piece and get from it that many grains of pure 
gold. A $10 gold piece is accordingly practically 
equivalent in value to 232.2 grains of pure gold, 
and a dollar is equivalent to the value of 23.22 
grains of pure gold. The United States currency 
system is on a gold standard, and all of our dif- 
ferent kinds of money are interchangeable with 
gold. 

A dollar, therefore, represents the value of 23.22 



WHEN PEICES ARE RISING 27 

grains of pure gold put up by the government in 
the form of coins. Anything that changes the 
value of gold changes the value of a dollar, and 
tends to change the price of every article quoted in 
terms of dollars; that is, the price of everything 
which is bought and sold. But gold, like other 
commodities, obeys the law of demand and supply. 

A reference to the accompanying chart on page 
25 shows the movement of the world's gold pro- 
duction since 1820. The chart shows the great 
increase at the time of the Californian and Austra- 
lian gold discoveries of the middle of the last 
century, the tendency for gold production to de- 
cline about 1860 to about 1890, at a time when the 
movement of many countries from a silver stand- 
ard or bimetallic standard of currency to a gold 
standard was leading to a greatly increased de- 
mand for the yellow metal; and finally it shows 
the steady and phenomenal increase in production 
since the early nineties. 

The average annual production by 5-year 
periods since 1891 has been as follows: 

Period Millions of Dollars Thousands of Ounces 

1891-1895 163 7,880 

1896-1900 257 12,450 

1901-1905 323 15,610 

1905-1910 434 20,980 



28 HOW TO INVEST 

The world's production of gold in 1910 was 
over 3^ times as large as in 1870, over 4^ times 
as large as in 1880, more than 31 times as 
large as in 1890, and 78 per cent, larger than in 
1900. 

Gold is a durable commodity and its annual 
product is not used up, like that of wheat, from 
year to year. On the contrary, the world's stock 
is an accumulation of ages. The enormous gold 
production each year during the last decade and 
a half has greatly increased the world's available 
supply, and as the demand, though greatly in- 
creased, has not kept pace with the supply, the 
value of gold has fallen — in other words, the 
price levels in all gold-standard countries through- 
out the world have risen. 

The present advance in prices is in many re- 
spects a repetition of what happened at the time of 
the great Californian and Australian gold discover- 
ies in the latter '40's and early '50's. (See chart.) 
Then as now people were greatly concerned with 
the rising cost of living. All sorts of explana- 
tions were given at the time, but the verdict of 
history seems to be that the chief cause was the 
greatly increased gold production. This rise in 
prices about the middle of the last century was 



WHEN PEICES AEE RISING 29 

followed, as we have seen, by a long period of 
falling prices, wlien the supply of gold did not 
keep pace with the demand. The evils of this 
long period of falling prices led to the great con- 
troversy over bimetallism. About 1897 the gold 
production in South Africa turned the tide of 
prices from a falling one to a rising one, and since 
that time we have heard little of bimetallism, but 
much of the rising cost of living. 

Improved Credit Facilities and Increased 
Rate of Monetary Turnover 

The last important factors in the recent rise of 
prices to be considered are improved credit facili- 
ties and the increasing rate of monetary turnover. 
Any commodity tends to decline in value when 
less expensive substitutes are used in its place. 
The last decade and a half has witnessed a re- 
markable development in the use of credit as a 
means of payment; our banking power has much 
more than doubled, checks are being used to an 
increasing degree as media of exchange, and our 
bank note circulation increased from $200,000,- 
000 to nearly $700,000,000 between 1895 and 
1910. Similar developments, although in most 



30 HOW TO INVEST 

cases not so rapid, have been taking place in many 
other countries. 

If money turns over more rapidly it is obvious 
that a given amount will do more money work. 
A million dollars with an average rate of turnover 
of 20 will perform $20,000,000 of money work 
in a year, while if its rate of turnover is doubled 
it will perform $40,000,000 of money work. That 
increase of money work may be represented by the 
exchange of the same amount of commodities at 
a higher price level or of a larger amount of com- 
modities at the same price level, etc. Professor 
Irving Fisher, of Yale University, in his book, 
The Purchasing Power of Money, estimates that 
the rate of monetary turnover increased about 12 
per cent, from 1896 to 1909. 

We have, therefore, the situation of a more ef- 
ficient use of money, and a rapid development of 
the use of effective money substitutes, at a time 
when the mines are pouring out the standard 
money metal as never before. 

A Word as to the Future 

Two forces appear likely to exert a strong in- 
fluence, for some time to come, in the direction of 
higher price levels : . 



WHEN PRICES ARE RISING 31 

One force is a continuation of the present large 
and increasing gold production. Known gold de- 
posits are still enormous and new gold fields may 
be discovered ; while improvements in methods of 
mining and metallurgy are making it profitable to 
work poorer and poorer ores. Much of the world's 
gold to-day is being obtained from ores which 
would have been discarded as worthless a genera- 
tion ago. 

The other force is the improvement of our mone- 
tary and banking mechanism in such ways as to 
increase the efficiency of money — a result equiva- 
lent in its influence on prices to an increase in 
the supply of money. We may reasonably expect 
the rate of monetary and of deposit turnover to 
increase in the future, we may expect a more 
extensive use of checks in place of cash by the pub- 
lic, and we may expect a higher degree of cen- 
tralization and of efficiency in our American bank- 
ing business. All of this will tend to cheapen 
gold. 

It is true, there are certain general forces which 
will tend to increase the value of gold. Space 
will merely permit the mention of a few important 
ones: (1) As population and trade increase there 
will be an increased demand for circulating 



32 HOW TO INVEST 

media; (2) as the world's existing supply of gold 
increases a given annual product will represent 
a smaller and smaller percentage of the total sup- 
ply. A cup of water poured into a small pail will 
raise the level of the water in the pail much more 
than will the same cup of water poured into a 
large pail. (3) As the best gold deposits are 
worked and it becomes necessary to resort to 
poorer mines and more inaccessible veins, the cost 
of mining gold will increase. Furthermore, as 
prices rise, the cost of labor, machinery, chemi- 
cals, etc., used in gold production will continue to 
increase, while gold enjoys the distinction of being 
the only commodity (in gold-standard countries) 
whose price remains constant. 

It is dangerous to prophesy as to what will be 
the resultant of these forces (and numerous others 
that might .be mentioned), some working in one 
direction and some in the other; it seems, to the 
writer, probable, however, that we may reasonably 
expect a continuation of rising prices for some 
years to come ; rising prices, however, accompanied 
by temporary reactions in the form of commercial 
crises and depressions similar to the ones we have 
recently experienced. 



CHAPTER III 

RISING PRICES AND INVEST- 
MENTS 

BY HARRY GUNNISON BROWN, PH.D. 

Assistant Professor of Political Economy, Yale University 



33 



CHAPTER III 
Rising Prices and Investments 

ONE of the most discussed phenomena of 
recent years is the tremendous rise in the 
cost of living. The increase of prices 
has not been peculiar to the United States, but has 
been world wide in its reach. The following index 
figures of the Bureau of Labor, for the United 
States, and those of Sauerbeck, of England, show 
us with perhaps the greatest exactness at present 
attainable, the extent of the rise in average prices, 
and therefore of the depreciation of money since 
1896: 

Year United States England 

1896 90.4 61 

1897 89.7 62 

1898 93.4 64 

1899 101.7 68 

1900 110.5 75 

1901 108.5 70 

1902 112.9 69 

1903 113.6 69 

1904 113 70 

1905 115.9 72 

1906 122.5 77 

1907 129.5 80 

1908 122.8 73 

1909 126.5 74 

1910 131.6 78 

35 



36 HOW TO INVEST 

This rise of prices is generally attributed, and, 
it would seem, rightly so, to the enormously in- 
creased production of gold during the last two 
decades and the consequent increase in the mone- 
tary and credit media of exchange. Professor 
Kemmerer, of Princeton University, in his book 
on Money and Credit Instruments in Their Rela- 
tion to General Prices, and Professor Irving 
Fisher, of Yale, in The Purchasing Power of 
Money, have given to this subject a more exact 
mathematical statement than it had hitherto re- 
ceived, but economists generally have long recog- 
nized a relation between the quantity of money 
and the average of prices. 

Importance of Rising Prices to the Investor 

This recent depreciation of money would be 
of no importance to any of us if money incomes all 
changed alike and by just the same amount as 
prices generally, that is, if our incomes increased 
automatically as prices increase. But such is not 
the case. Wages and salaries are likely to be ad- 
justed too slowly to a changing value of money, 
and the same tardiness of adjustment, perhaps a 
greater, is found in the case of certain classes of 
investments. It is these facts which give to the 



WHEN PRICES ARE RISING 37 

subject its very great practical interest to nearly 
everyone, to those who get money incomes in the 
form of wages and salaries and no less to those 
who derive their incomes in whole or in part from 
invested capital. The former class are often, in- 
dividually, unable to avoid loss from rising prices, 
though sometimes, by organization, they may suc- 
ceed in making money wages almost keep pace 
with prices of goods. 

But the individual investor is not thus helpless. 
In so far as he has occasion to make new invest- 
ments, he can put his capital where it will per- 
haps yield him more rather than less because of 
the changing level of prices; and even his past 
mistakes may be, in part, rectified by the investor 
who realizes the effects of a depreciating standard, 
since those who do not realize these effects are 
ready to take the less prospectively profitable se- 
curities off his hands, leaving him free to reinvest 
more wisely. 

The Two Main Classes of Investments 

Generally speaking, investments are of two 
classes, depending upon the constancy or the vari- 
ability of the expected return. In the one class are 
short-term notes, mortgages, bonds, preferred stock, 



38 HOW TO INVEST 

etc., yielding a fixed per cent, on investment. In 
the other class are investments such as common 
stocks and industrial or commercial enterprises 
under the direct control of the investor. These 
yield returns not fixed in advance by agreement 
but dependent, in each case, upon the earnings 
of the business. Investments of the latter class 
are not affected in the same way as those of the 
former, by changing prices. Investors in the 
former class of securities, i. e., investors receiv- 
ing stipulated rates of return, are of the lending 
or creditor classes or are in an analogous position. 
The other class of investors, if the companies in 
which they are interested have outstanding bonds 
or other obligations of a similar nature, are es- 
sentially borrowers or in the position of borrowers. 
In general, the lending class gains when prices are 
falling and loses when prices are rising; the bor- 
rowing class gains when prices are rising and loses 
when they are falling. 

In other words, if you buy the bonds of a certain 
company, you are really lending money to that 
company and you are limited to a fixed rate of 
interest as long as the loan stands, even though 
values increase and the buying power of that fixed 
return depreciates. On the other hand, if you 



WHEN PEICES ARE RISING 39 

buy the stock of that company, you, as one of 
the owners, are really borrowing money of those 
who buy your bonds. Therefore, as values in- 
crease and the worth of the interest you pay de- 
creases, you gain to the same extent that the bond- 
holder loses. 

Rising Prices and Interest Rates 

In order that borrowers and lenders should find 
themselves in the same position relatively to each 
other when prices have been rising or falling, i. e., 
when money has been depreciating or appreciat- 
ing, the rate of interest on loans would have to be 
adjusted to these conditions. Suppose, for in- 
stance, that prices increase 5 per cent, in a year, 
which is simply another way of saying that money 
depreciates 5 per cent, in a year. That means 
that a man who had lent $100 for the year at 4 
per cent., getting back $104 at the end of the year, 
would lose over 1 per cent, in real value. The 
$100 or so-called principal has lost 5 per cent, of 
its purchasing power during the year. The 4 per 
cent, nominal interest is not enough to compensate 
for the 5 per cent, loss in purchasing power, even 
when we overlook the fact that the $4 interest, as 
well as the principal, is affected by the deprecia- 



40 HOW TO INVEST 

tion of money. Usually the loss from year to 
year is not so great as this, though in some years 
it is even greater. In 1899, for example, money 
depreciated 8.2 per cent. That year, the person 
who loaned money at 4 per cent., instead of real- 
izing a profit actually lost more than 4 per cent, 
on the investment. 

The writer has in mind the case of a man who 
loaned a considerable sum of money in the early or 
middle nineties, on farm mortgage security, at 
3 per cent, interest. Since 1896 money has de- 
preciated at the rate of 2.4 per cent, a year. This 
man, therefore, has actually realized, since that 
year, scarcely more than \ per cent, a year on his 
loan. Certainly, had he been able to foresee the 
situation, he would have been likely to insist on 
a higher rate. 

If borrowers and lenders are to be in anything 
like the same relative position, interest should be 
proportionately higher when money is depreci- 
ating, that is, when prices are rising. Thus, if 
interest is normally 5 per cent, a year and money 
is depreciating 3 per cent, a year, the interest 
charge could fairly be about 8 per cent, without 
there being any undue or unusual profit to the 
lender or any undue hardship for the borrower. 



WHEN PRICES ARE RISING 41 

To the extent that this adjustment is not made, the 
borrower gains and the lender loses. Reversely, 
if money is appreciating in value, the lender gains 
and the borower loses. 

The Varying Value of Interest 

To what exent is appreciation of money bal- 
anced by a lower rate of interest, or depreciation 
of money by higher interest? Only to a small 
degree. So largely is the dollar looked upon as a 
settled and unchangeable standard, so little is its 
variability in purchasing power practically con- 
sidered, despite plentiful evidence of this vari- 
ability, that the adjustment of interest rates to 
the changing value of money seems almost negli- 
gible. The difficulty is the greater, because, even 
when all these possibilities are borne in mind, we 
cannot be absolutely certain how or to what extent 
money will change in value over either a long or 
a short future period. We may expect, for in- 
stance, a continued depreciation, but we cannot be 
sure of it or of its extent and continuance. 

In The Bate of Interest, Professor Fisher has 
set forth numerous statistical data which seem to 
show, in the aggregate, some tendency toward ad- 
justment of interest to price changes. If money 



42 HOW TO INVEST 

is depreciating there is some tendency for interest 
to rise, and if it is appreciating, for it to fall. 
But this rule, if true for a majority of cases, is 
also subject to numerous exceptions. And even 
when there is adjustment, it is exceedingly slight 
The following figures (from Irving Fisher's The 
Bate of Interest, brought down through 1910 by 
compilations from the Financial Review and the 
Economist), giving interest rates, appreciation 
and depreciation of money, and virtual interest 
(i.e., interest realized in actual purchasing power), 
show to how small a degree money rates of interest 
change and how great, therefore, are the differ- 
ences realized in virtual interest when prices are 
rising and when they are falling: 

New York Rates of Interest in Relation to Rising and 

Falling Prices. Taken from Prime Two-Name 

60-Day and 90-Day Paper 



Years 


Per Cent. 
Interest 


Per Cent. 
Appreciation ( 4 ) 
or Depreciation^ ) 

of Money 


Per Cent. 
Virtual Interest 


1875-1879.... 


.. 5.1 


+7.9 


+13.0 


1880-1884 .... 


.. 5.4 


+0.6 


+ 6.0 


1885-1891.... 


.. 5.1 


—0.2 


+ 4.9 


1892-1897.... 


.. 4.6 


+5.6 


+10.2 


1898-1906.... 


.. 4.6 


—3.5 


+ 1.1 


1907-1910.... 


4.9 


—0.5 


+ 4.4 


1875-1896.... 


.. 5.1 


+2.6 


+ 7.7 


1897-1910. . . . 


4.6 


—2.4 


+ 2.2 



WHEN PRICES ARE RISING 43 

Bank of England Rates of Interest in Relation to 
Rising and Falling Prices 

Per Cent. 



Years 


Per Cent. 
Interest 


Appreciation ( 4- ) 

or Depreciation(— ) 

of MoDey 


Per Cent. 
Virtual Interest 


1874-1879.... 


.. 3.2 


+4.3 


+7.5 


1880-1887.... 


.. 3.3 


+3.8 


+7.1 


1888-1890.... 


.. 3.8 


—1.4 


+2.4 


1891-1896.... 


.. 2.5 


+3.4 


+5.9 


1897-1900.... 


.. 3.2 


—6.6 


—3.4 


1901-1906.... 


.. 3.6 


—1.5 


+2.1 


1907-1910.... 


.. 3.7 


—0.9 


+2.8 


1897-1910.... 


.. 3.5 


—1.6 


+1.9 



Obviously, then, the relatively few investors who 
fully realize the situation cannot, because of the 
fact that money is depreciating, get higher rates 
of interest on loans. As long as the great mass of 
investors are willing to lend at ordinary rates, the 
few who are not willing to, cannot, merely on that 
account, get more. 

But they need not he lenders. If one antici- 
pates an average depreciation of money, during 
the period of investment, of 2 per cent, a year, 
and can get only 3 per cent, interest, e. g., on a 
mortgage investment, he would better not make it 
at all. An alternative to lending is to invest the 
money in an enterprise under one's own direction 
or in any form which entitles one to a share in the 



44 HOW TO INVEST 

profits of an enterprise instead of to a fixed sum, 
for example, to buy land and homes and rent them. 

Bonds vs. Stocks as Investments 

The same argument would favor investment in 
stocks rather than in bonds during periods of 
money depreciation (rising prices). In the quo- 
tation supplement of the Commercial and Finan- 
cial Chronicle for January 4, 1902, 4^ per cent, 
bonds of the Philadelphia & Reading Railroad, 
maturing in 1910, were quoted at 110. The prin- 
cipal, due in 1910, was $100, and this, together 
with the last year's accrued interest, would make 
$104.50 due in that year. Yet that amount in 
1910 would buy no more than $89.66 would buy 
in 1902, money having depreciated 14.2 per cent. 
Similarly, the $4.50 of interest due in 1909 was 
equivalent in purchasing power only to $4.02 in 
1902, while the interest due in 1908 was equiva- 
lent to $4.05 in 1902. Would an investor who 
foresaw the depreciation of money have been will- 
ing to give $110 in 1902 ? 

Again, first mortgage 4J per cent, gold bonds 
of the Pennsylvania Company, due in 1921, were 
quoted for January, 1902, at 114 to 114^. But 
if money depreciates until 1921 at the same rate 



WHEN PRICES ARE RISING 45 

as since 1902 (which, of course, it very likely 
will not) it will then have lost 33.7 per cent, of 
its purchasing power. Hence, the $104.50 due in 
1921 will have a purchasing power equal to $69.28 
in 1902. In that case was the bond really worth 
$114 in 1902 ? 

When Bonds Are Profitable 

It may sometimes be worth while to invest in 
bonds even when money is depreciating, if one 
happens to know of bonds paying a fair rate of 
interest and which, because the investing world 
does not appreciate their goodness, are selling at a 
low price. But the man who takes due account of 
changes in the value of money will not, when 
money is depreciating, be willing to pay as much 
for bonds in general as the average investor. If 
an investor bears in mind, for example, an ex- 
pected annual depreciation in money of 4 per cent., 
and if, otherwise, he would consider 5 per cent. 
a fair return on bonds of the security in question, 
he will not be willing to pay for the bonds a price 
higher than will give him 9 per cent, on his actual 
investment. What this price will be can be found 
from bond tables or may be arrived at by discount- 
ing each annual installment of interest and prin- 



46 HOW TO INVEST 

cipal at 9 per cent, and compounding in each case 
according to the number of years to be waited. 

As the average investor, overlooking the prob- 
able depreciation of the dollar, will be willing to 
pay a higher price than the far-seeing investor 
can afford, the latter is generally obliged to turn 
to some other form of investment In a period of 
rising prices he will find that it does not pay to be 
a creditor, either as mortgagee or bondholder. He 
will desire some use of his capital which will yield 
him a share of the profits dependent upon the pros- 
perity of the business. If, therefore, he does not 
care to invest the money in business under his 
own personal direction, he will prefer putting it 
into good corporation stocks. He will not invest 
in bonds unless they are convertible into stock, 
or carry a stock bonus, or for other special reasons. 

An Example of Stock Profits 

In order to see what is the relative position of 
stock and bond holders, during periods of rising 
prices, let us assume a rise of 20 per cent. A 
certain business (a corporation) has had invested 
in it $100,000,000. Of this total, $75,000,000 
has been contributed by bondholders at 5 per cent., 
who are therefore creditors for that amount. The 



WHEN PEICES AEE KISING 47 

other $25,000,000 has been contributed by stock- 
holders. Before the rise of prices occurred, its 
expenses for labor and materials were $25,000,000 
a year; its gross profits were $30,000,000. Its net 
profits were $5,000,000, or 5 per cent, on the total 
investment, thus giving the same return to both 
classes of investors. 

The 20 per cent, rise of prices has meant that 
its running expenses are $30,000,000 instead of 
$25,000,000. But as it has been able to raise the 
prices of its own goods in the same proportion the 
gross profits are now $36,000,000. The net profits 
are therefore $6,000,000. They have increased 
by 20 per cent., the exact degree by which prices 
in general have risen. Therefore, in purchasing 
power over goods, the earnings of the company are 
neither better nor worse than before. The value 
of the investment will now be $120,000,000 in- 
stead of $100,000,000, because though represent- 
ing no more capital, it represents also no less, and 
is measured in a cheaper dollar. 

If the total investment had come from share- 
holders, the rise of prices, provided it affected ex- 
penses and gross profits equally, as in this case, 
would signify nothing. But three-quarters of the 
investment has been provided by bondholders. 



48 HOW TO INVEST 

No matter that the profits are now $6,000,000 ; no 
matter that money has depreciated and 20 per 
cent, more is required to purchase the same goods. 
The bondholders are entitled only to 5 per cent, 
interest on $75,000,000 and this is $3,750,000. 
It is worth considerably less than its former pur- 
chasing power. The shareholders get not only 
enough more money to compensate for the 20 per 
cent, rise of prices hut also the 20 per cent which 
the bondholders cannot get. 

How Value of Stock Increases 

The bondholders continue to get 5 per cent. 
on their original investment. The stockholders 
now get $2,250,000 on an original investment of 
$25,000,000, that is, 9 per cent. But the value 
of the business has increased 20 per cent, measured 
in money, and is now $120,000,000. Of this, the 
bondholders may be regarded as possessing a claim 
to $75,000,000, for despite the depreciation of 
money, they are entitled only to the agreed 5 
per cent, of that and to that amount itself at ma- 
turity. Hence, the value of the stock is, rightly 
speaking, $45,000,000, an increase in value of 80 
per cent., in the same proportion as the increase 
of dividends. 



WHEN PEICES ARE RISING 49 

Had the situation been dearly foreseen by in- 
vestors, the bonds would have sold considerably be- 
low and the stock considerably above par; and 
even now, we have not shown the full gain likely 
to have accrued to shareholders, since, in general, 
wages rise more slowly than prices. The net 
profits, therefore, are likely to increase by more 
than 20 per cent, and all of this increase goes to 
the shareholders. 

The same objection which applies to bonds as 
investments during periods of rising prices, ap- 
plies also, in large part, to those preferred stocks 
which have a fixed dividend limit. This objection 
may apply also, in some degree, even to the com- 
mon stocks of public service corporations such as 
railroads, street railways, and lighting companies. 
In so far as the rates charged by these corpora- 
tions are subject to legal regulation, these rates 
may be prevented from increasing to the same ex- 
tent as other prices. 

If rise of money prices can mean no increase of 
money return to investors, then the investment is 
not the most profitable one. It should be added, 
also, that the objection against bonds does not tell 
equally against convertible bonds. If bonds can 
be converted into stock at will, then any special 



50 HOW TO INVEST 

profit which changed conditions give to stock- 
holders can be shared by bondholders. 

Needless to say, the suggestion that stocks are 
better investments than bonds when money is de- 
preciating, does not mean that anyone who learns 
this fact can immediately acquire riches by such 
investment. There are stocks and stocks, i. e., 
there are sound stocks and wild-cat stocks. The in- 
vestor cannot hope to choose wisely unless he knows 
detailed facts about special securities, but it is 
something gained to have a well-based preference 
as to the hind of securities most profitable. 

Further Price Increase Probable 

We have considered so far the way in whicE 
changes in the value of money affect different se- 
curities as desirable investments. But of what 
avail is it to tell a man that if prices are going 
to rise stocks are a better investment than bonds, 
unless he can also determine in advance whether 
prices are likely to rise or fall ? As a matter of 
fact, no one can tell in advance, with certainty, 
whether they will do the one or the other. To-day, 
statistics seem to show a steady increase and a 
rapid one, year by year, in the annual gold pro- 
duction. This fact points toward a continuance of 



WHEN PEICES AEE EISING 51 

rising prices for several years. Yet it must be re- 
membered that a very large annual production of 
gold, unless increasing from year to year, would 
not indefinitely raise prices. Each year the total 
stock of money would become larger, and each 
year, therefore, the new additions would probably 
be a smaller per cent, of the total. 

In consequence, if the growth of business should 
involve a corresponding increase in the demand 
for money, prices would soon cease to rise. Then 
again, disturbance of peace in gold-producing re- 
gions may interrupt production, and sudden fail- 
ure of business confidence may cause collapse of 
credit and temporary fall of prices. 

Conclusion 

All we can say is that present knowledge points 
toward a large and probably increasing gold pro- 
duction for a number of years, that there has been 
a considerable rise of prices since 1897, and that 
there is likely to be some further rise. It is prob- 
able, therefore, that holders of stock will gain some 
advantage over the creditors of their respective 
corporations, although, if a fall of prices should 
set in, the reverse would be the case. But in- 
vestors in enterprises which have no creditors, 



52 HOW TO INVEST 

where, for example, if the enterprises are in the 
corporate form, the entire capital is furnished by 
purchasers of common stock, will probably be less 
affected either for better or worse by prospective 
changes in the value of money. 



CHAPTER IV 

BONDS AS AN INVESTMENT 
WHEN PRICES ARE RISING 

BY WALTER E. CLARK, PH.D. 

Professor of Economics, the College of the City of New York 



CHAPTEE IV 

Bonds as an Investment When Prices Are 
Kising 

THAT general commodity prices have been 
rising since 1897, and that the basic cause 
of this rise is the cheapening of gold, are 
two scientifically established propositions. 

A third proposition of great moment to air in- 
vestors grows out of the facts and the reasoning 
supporting these first two. This proposition is: 
Commodity prices will probably continue their 
generally upward trend for many years to come. 
This third proposition is so necessary to the 
main theme of this article that the line of reason- 
ing which makes it a scientific prophecy and not 
a mere blind guess at the future, needs to be indi- 
cated before the main theme is developed. 

Will Prices Continue to Rise? 

Accepting the first two propositions cited above, 
it follows that if general commodity prices are to 
stand still or to decline steadily in the future, it 

55 



56 HOW TO INVEST 

will be because gold appreciates in value. But 
gold is a commodity. It is subject to the regular 
economic law of value. If it is to appreciate in 
the future, then either its supply must increase 
less rapidly, or demand for it must increase more 
rapidly, than in the past fifteen years. 

To decrease the supply of gold or to increase de- 
mand for it, some such condition as the following 
must obtain: 

(1) The world's annual output of gold must 
stand still or grow steadily smaller in the coming 
years. 

(2) The general means for transportation and 
exchange must cease to progress or must positively 
decline in efficiency. 

(3) The volume of business exchange must in- 
crease far more rapidly than in the past. 

Consider in order, the probabilities that these 
conditions will appear in the near future: 

(1) Will the world's annual gold output di- 
minish ? 

Facts seem clearly to indicate the contrary. 
This output has steadily increased for 21 years 
past, excepting only the years 1900 to 1902, when 
the Boer War suspended mining in South Africa. 
Through this steady increase the world's annual 



WHEN PRICES AEE RISING 57 

output has risen from $118,000,000 in 1890 to 
$466,000,000 in 1911. 

If known gold fields were to be exhausted, and if 
mines now worked were to be abandoned as un- 
profitable, because gold was growing cheaper, then 
the world's annual gold output would decrease, 
provided no new mines were developed. But con- 
sideration of the South African and of the Ameri- 
can gold fields makes this improbable. 

In 1904 an expert estimated that the definitely 
known and accessible gold yet unmined, in South 
Africa alone, was worth over $12,000,000,000. 
The new processes for securing gold make it profit- 
able to work ores yielding less than one-half the 
average present yield per ton of the South Afri- 
can field. These two facts — huge supply in sight 
and wide margin of profit safety — make it alto- 
gether probable that South Africa, already pro- 
ducing more than one-third of the world's annual 
gold output, will steadily increase its gold produc- 
tion for many years to come. 

Gold Output Certain to Increase 

The great American ranges of mountains, ex- 
tending from the Behring Sea to Cape Horn, are 
already producing gold in hundreds of places. 



58 HOW TO INVEST 

Their gold-producing possibilities are yet far 
from maximum development. Within the past 
fifteen years two notable new gold fields have been 
here developed, while the introduction of the 
cheaper mining and extractive processes has 
caused the profitable working of formerly aban- 
doned mines. It is altogether probable that, within 
the coming generation, this 9,000-mile stretch of 
gold-hearted American mountains will increase its 
annual output far beyond the $150,000,000 which 
it now produces. 

It probably needs only the application of more 
capital and of the newer methods to make great 
Asia, with its widely scattered and, in the main, 
primitively developed gold deposits in India, in 
China, in Siberia, a full rival of Africa and 
America as a gold-producer. 

There still remains nearly 10 per cent, of loss 
in the extraction of gold from refractory ores. 
Coming years may reduce this ratio of loss, as 
they will surely extend the application of the best 
and cheapest processes to a much greater part of 
the gold-producing area. 

These facts of steadily rising world annual gold 
output, of richness and extent of known gold de- 
posits, added to these probabilities of the discov- 



WHEN PEICES AEE KISING 59 

ery of new fields, the invention of more perfect and 
cheaper mining and ore-extracting methods, and 
the application of latest methods to thus far primi- 
tively worked fields, make a strong case for the 
long continuance of the steady increase in the 
world's annual gold output. 

(2) Will progress in transportation and ex- 
change cease? 

This is an age of concentration, of emphasis 
upon efficiency, and of multiplying inventions. 
Means of transportation and communication, sys- 
tems of credit, of accountancy, and of exchange 
generally, will certainly continue to be improved 
steadily. Every such improvement will enable a 
given amount of gold to do more work. This will 
further cheapen gold. 

(3) Will the future business volume increase 
more rapidly than in the past ? 

There seems to be no reason for expecting more 
rapid increase in the total volume of world ex- 
changes than has been occurring during the past 
fifteen years. Such factors as lessening rates of 
population increase, rapid exploitation of virgin 
natural resources, and shifting of social emphasis 
from production to distribution of wealth, seem to 
point the other way. 



60 HOW TO INVEST 

It stems, then, to be strongly probable that an- 
nual world gold output will steadily increase, that 
exchange means will be more perfect, and that 
volume of business will not increase any more 
rapidly than in recent years. Such probabilities 
justify the prophecy that commodity prices will 
continue to rise generally for many years to 
come. 

Granting, then, that commodity prices will con- 
tinue to rise generally, every investor needs to 
consider the effects of rising prices upon bonds, 
stocks, realty, and business generally. It is the 
purpose of the remainder of this article to con- 
sider bonds as a form of investment in a rising- 
price era. 

Attention will be confined to bonds pure and 
simple, since a later chapter in this book will deal 
with the subject of bonds accompanied by a stock 
bonus. 

The Theory of Bond Values During a 
Rising-Price Era 

A Bond has been well defined as "a promise 
to pay a definite sum of money at a definite future 
date, with interest at a fixed rate payable at stated 
intervals in the meantime." The italics indicate 



WHEN PRICES ARE RISING 61 

the significant things for our immediate considera- 
tion. What we seek to know is the effect of rising 
prices upon fixed sums of money due in the fu- 
ture. An illustration will show this effect most 
clearly. 

Suppose that an investor pays par value for a 
$1,000 bond bearing 4 per cent, interest. If dur- 
ing the following year prices rise 2J per cent, 
(about the actual compounding annual average 
rise for the past 15 years) the investor must have 
$1,025 at the end of the year to have the same 
purchasing power which his $1,000 represented at 
the beginning of the year. But, supposing that, 
at the end of the year, he can still get $1,000 for 
his bond, he will then have $1,040, principal and 
interest. This is $40 more money, but only $15 
more purchasing power than he had at the begin- 
ning of the year. And this $15 will not buy so 
much as $15 would have bought then! Further- 
more he probably could not get the full $1,000 for 
his bond. Allowing, then, for his loss in purchas- 
ing power as to both principal and interest, he has 
received less than 1£ per cent., instead of 4 per 
cent., on his invested capital. 

This simple illustration tells the whole story. 
The principle involved is that a general rise in 



62 HOW TO INVEST 

prices lowers the real income of those whose in- 
come in dollars and cents is fixed. It must be 
emphasized that this principle applies as much 
to the whole sum paid in the redemption of a bond, 
at maturity, as it does to the periodic sums paid in 
interest. Both kinds of payments are fixed sums 
and therefore have decreasing purchasing powers 
as the years of a rising-price era pass. 

Why Bond Values Fall 

Further, it is to be noted that a rising-price 
period brings business prosperity. Business 
profits, the current interest rate, and rents, all 
tend to rise. Therefore those forms of invest- 
ment which continue to yield a fixed income tend 
to be discounted. Bonds, yielding continuously 
the same dollar and cent income, tend to fall in 
market value. 

In this connection it is worthy of attention that 
this effect of rising prices upon bonds is somewhat 
enhanced in the case of premium bonds, and some- 
what retarded in the case of discount bonds. That 
is, if the investor in bonds pays more than par for 
his bonds the premium is slowly written off from 
the market value of the bond as it approaches ma- 
turity. On the other hand, the bond bought below 



WHEN PEICES AEE RISING 63 

par slowly appreciates toward par as it matures. 
It is all too common among investors, and among 
bond dealers, too, to consider only the market quo- 
tation and the rate of interest on a bond, and to 
neglect altogether the fact that it will be redeemed 
at par when matured. Really conservative in- 
vestors will not neglect this item, except in the 
case of very long time bonds. For example, one 
considering investment in West Shore Ists, due 
to mature in the year 2361, may safely neg- 
lect it. 

Do the facts of the recent period of rise in prices 
bear out this theory of lowering bond values ? 

Bonds issued by great nations are not so sub- 
ject to value variations due to business vicissi- 
tudes as are bonds issued by corporations. Gov- 
ernment bond quotations are therefore generally 
a safer and truer index for general price variations 
than are corporation bond quotations. 

United States Government Bonds are something 
of an exception to this rule. They have a very 
artificially sustained price since national banks 
must buy them. Yet even these bonds show a de- 
cline in market value. If the 2 per cent, bonds 
of 1930 be chosen for illustration the average an- 
nual net prices are: 



64 HOW TO INVEST 

United States Government 2's of 1930. Average Annual 
Quotations 

1900 104.04 1906 103.95 

1901 107.30 1907 105.18 

1902 108.78 1908 103.93 

1903 107.09 1909 101.47 

1904 104.99 1910 100.87 

1905 104.16 1911 100.63* 

Steady and still greater declines are shown by 
the leading government securities of Great Brit- 
ain, Germany, and France. English Consols were 
quoted at 90.75 in 1903, the first year of the 2J 
per cent, rate, and at 73 in October, 1912. 
German Imperial loans were quoted: the 3|'s, at 
104.58 in 1896, and at 93.17 in 1910, and the 3's 
at 99.22 in 1896, and at 84.41 in 1910. The 
French Rentes 3's, in their long history, give a 
striking double illustration of the inverse relation 
of general prices and bond values. Average an- 
nual net prices for three years, only, are quoted 
to save space necessary for the entire table : 

French Rentes — Average Annual Net Prices 

1879 79.64 

1897 102.95 

1912 (April) 92.70 

With intermittent changes, notable in all se- 
curities, if listed day by day, these Eentes rose 
steadily from 1879 to 1897 when they were high- 

* The last quotation is obtained by averaging the high and low for 
1911. The last sale for 1911 occurred November 21, at 100.125. 



WHEN PEICES AEE EISING 65 

est, and as steadily they have declined ever since, 
registering their lowest price, since 1897, in April 
of 1912. The double illustration appears when 
this course of Rentes prices is compared with the 
course of general commodity prices, having in 
mind that the general commodity prices fairly 
steadily declined from 1879 until 1896-97, when 
they were lowest, and that they have steadily 
mounted ever since. 

The value of securities issued by private busi- 
ness corporations are so responsive to the ups and 
downs of trade, so sensitive to the chance effects of 
new inventions or new legislation, so dependent 
upon the business intelligence and integrity of par- 
ticular men in charge of the corporations, that 
it is difficult clearly to connect variations in the 
value of private corporation bonds and the course 
of general prices. The vast varying volume* of 
bond issues and cancellations by such corporations, 
changing the supply so greatly, is another compli- 
cating factor. Yet it is of interest to note that 
the general trend of corporation bond prices seems 
to accord with the theory. 

* The values of bond issues for the year 1911, as compiled by the Jour- 
nal of Commerce, were: Railroad bonds, $670,814,900; Industrial bonds, 
$322,094,000. 



66 HOW TO INVEST 

Decline in Railroad Bonds 

The Wall Street Journal has published from 
time to time a chart of the course of prices of 25 
representative railroad bonds. This study covers 
the past 7 years only, but, even in that half of 
the whole period of steadily rising prices, the 
factual returns correspond to the theory set forth 
above. Prices are quoted in monthly averages 
for the 25 railroad bonds. Taking the averages 
for January 1, of each year, as illustrative of the 
whole table, we get : 

Averaged Quotations for 25 Representative Railroad 
Bonds as for January 1st of Each Year 

1906 97.915 1910 92.84 

1907 94. 14 1911 91.43 

1908 88.665 1912 90.945 

1909 . 93.715 1912 (March) . .90.825 

Perhaps the table needs no further comment 
than that made by its author in connection with 
one issue of his table : "With the exception of the 
year of the crash, the past 6 years have shoTvn 
consistent declension of bond values. Whether 
this fact be wholly explainable by the decreased 
purchasing power of gold, due to the increasing 
output of the metal, or in part, by some other 
cause, the fact remains and is incontrovertible. 
There have been sharp rises following sharper de- 



WHEN PEICES AKE KISING 67 

clines, and the course of prices has not adhered 
to any fixed angle of declension, but description 
of a line along the broad stretches of the market 
averages demonstrates incontestably the falling 
values of securities." (Wall Street Journal, Octo- 
ber 20, 1911.) 

Staple municipal and industrial bonds show 
the same general tendency as the railway bonds. 
Marked exceptions which occur can usually be ex- 
plained by special conditions in the particular is- 
suing corporations or the particular industry in- 
volved. For example, as a class public service 
corporation bonds other than tractions show 
hotable rises in average prices. Such corpora- 
tions were regarded as speculative fledglings 10 
or 12 years ago. So many of these corporations 
have, in the meantime, earned good standing 
with investors, that the demand for their bonds 
has been relatively large. It is this change in the 
general status of these corporations that explains 
them, as a seemingly notable exception to the rule 
of declining prices for the various classes of 
bonds. 

Both the deductive and the factual study seem 
to establish the proposition that, in the last 15 
years of generally rising prices, bonds have tended 



68 HOW TO INVEST 

to decline in value. Theory and facts thus seem 
to justify the prophecy that the coming years of 
further rise in general prices will bring with them 
further declines in bond values generally* 

Reasons for Bond Investment During a 
Rising-Price Era 

Accepting the above conclusions, two questions 
at once follow: 

(1) Should the intelligent investor still cling to 
bonds, but insist that he be given option to con- 
vert his bonds into stock, or that he be given di- 
rect bonus of stock with each bond purchased ? 

(2) Should the investor altogether shun bonds 
and turn to stock, or invest directly in realty or 
business ventures? 

Since the first question is to be dealt with in 
a later chapter in this book, it is passed here with 
the mere comment that opportunity for stock shar- 
ings, in the case of unusual gains, combined with 
the solid advantage of bond security seems to be 
a happy combination. 

As between bonds and stocks, or as between 
bonds and direct acceptance of realty or business 
partnership hazards, the investor will weigh care- 
fully obvious advantages of bonds: 



WHEN PEICES AEE EISING 69 

Safety and Regular Income 

(1) High-grade bonds are a safe and care-free 
investment in respect to both interest and principal 
payments. In time of business stress or liquida- 
tion, stockholders must lose all before bondholders 
lose anything, either in principal or interest. 

In return for this high-grade security and this 
freedom from business hazards in respect to both 
the principal and interest, the bondholder is satis- 
fied with a lower rate of return than he would de- 
mand if he were assuming greater risks. It is 
true that this income is not increased in pros- 
perous time, whatever may be the increase of earn- 
ings of the issuing company. It is also true, in 
perhaps full offset, in the long run, for the aver- 
age investor, that his income, short of the bank- 
ruptcy of the company issuing* his bonds, is not 
decreased, whatever the extent and duration of 
business depression. Stability and regularity of 
income are notable advantages of bonds. 

Stability of Value 

(2) High-grade bonds are stable in value. In 
business stress or prosperity they change in value 
slowly and slightly, compared with most other 
forms of property. Even their value-change, due 



70 



HOW TO INVEST 



to steadily rising prices, is slow and partial. This 
is due in part to the inertia, and in part to the 
loyalty, of bond investors. Many large investors, 
such as insurance companies, savings banks, and 
trustees generally, are largely limited by law to 
bond investments. Other investors are loyal to 
bonds because they choose their investments pri- 
marily for security of principal and for regularity 
and stability of income. 

For examples of the relative value stability of 
bonds and stocks, compare the quotations of bonds 
and stocks of two great railways: 



Railway 


Security 


Quotations 

between 

1900 and 1911 


Quotations 
in 
1911 




Low 


High 


Low 


High 


Reading . . < 


Bond— Gen'l 4s (1997) 

Stock 1st Pref 

Stock 2d Pref........ 

Stock Common 


86£ 
49 
23f 
15 


104J 

97 

117£ 

173| 


96| 
88 
87£ 
134 


98J 

92 
101 
161| 


Penna. . . . i 


Bonds — Consol. 4s 
(1948) 


100 
103£ 


105J 
170 


102 
118| 


104| 


i 


Stock 


130$ 





Shifting from Bonds to Stock 

(3) High-grade bonds, because of merits al- 
ready mentioned, are negotiable any time for ap- 
proximately what the investor paid for them, or 



WHEN PEICES AKE RISING 71 

they will readily be accepted as security for a loan 
to an amount representing a large proportion of 
their market value. This is an important con- 
sideration to the Simon-pure investor. Personal 
emergency may make it urgent that he realize on 
his holdings within a limited time. It is a still 
more important consideration to the investor who 
is alert for opportunity to increase his capital by 
a change from bonds to stock, or the reverse, when 
considerable gain is possible. And this has par- 
ticular application to a period of rising prices. 
Such an investor will keep his capital in the high- 
grade listed bonds while prices rise. The larger 
returns possibly offering in stocks are no tempta- 
tion to him. He bides the time of panic and de- 
pression. 

After the panic slaughters the prices of good 
stocks this investor realizes on his bonds, getting 
slightly less, if anything less, than the sum he paid 
for them, and he invests in good stocks at bargain- 
counter prices. When the rally comes — it may 
be months, or even a year or two — the good stock 
will again be quoted at high levels. Oftentimes, 
in the speculative folly of a wild bull movement, 
many stocks will be quoted at prices netting, 
through their regular dividends, a less percentage 



72 HOW TO INVEST 

of income than good bonds afford. This is the 
time to transfer back to the high-grade listed 
bonds, with a principal increased by the percent- 
age of rise in the value of the stock. 

The investor who has the solid judgment and 
the winning patience to follow such a plan has 
convincing reasons for keeping his capital in high- 
grade bonds, even during a period of soaring com- 
modity prices. Over-confident business exten- 
sion and optimistic credit distension, the fellow 
travelers of very high prices, are also the moni- 
tors of the coming panic time. Then the wise 
man, who keeps his capital in listed, instantly ne- 
gotiable, relative non-shrinkable, high-grade bonds, 
until the panic comes, will have opportunity to 
buy good stocks at prices so low that the specu- 
lative risk is negligible. 

(4) Finally, it is clear that the investor, pure 
and simple, may find in good bonds fairly perma- 
nent placement for his capital, with ample security 
for both principal and income, without being com- 
pelled to accept only 3J or 4 per cent, returns. 
In this period of rising prices security-issuing 
corporations recognize the tendency of the invest- 
ing public to desert bonds. They are being forced 
to issue bonds which yield 4J to 5£ per cent, on 



WHEN PRICES ARE RISING 73 

the market price. The permanent investor who 
can find a good bond, selling at less than par, 
which will net him 4J per cent, or better on his 
investment, will have a double offset for the ris- 
ing prices. He will be getting the higher income 
rate on his investment only because the high-price 
era has forced the bond issuer to concede this, and 
he also will gain the margin between par and the 
price he paid as the bond matures. 

Conclusion and Summary 

In summary this article has aimed to show: 

(1) That commodity prices will continue to 
rise generally for many years. 

(2) That rising commodity prices mean les- 
sened purchasing power for fixed incomes and 
fixed principal payments. 

(3) That bond values decline generally in a 
rising-price period. 

(4) That bonds have important advantages 
which entitle them to careful consideration by 
prospective investors, even in a period of rising 
prices. 



CHAPTER V 

STOCKS AS AN INVESTMENT 
WHEN PRICES ARE RISING 

BY J. PEASE NORTON, PH.D. 

Chairman of the Economic Section and Vice-President of the 
American Association for the Advancement of Science 



75 



CHAPTEK V 

Stocks as an Investment When Prices are 
Eising 

IN a consideration of the subject, Stocks as an 
Investment When Prices are Rising, the 
first question which is naturally presented to 
the mind is the following inquiry: Have stocks 
gone up in periods during which commodity prices 
have made sustained advances? The attempt to 
answer this inquiry is met by a condition. The 
statistical records upon which dependence must be 
placed are quite limited. It is true that some of 
the foreign index numbers of commodity prices 
go back almost a century, but the early records 
are hardly trustworthy and the statistics do not 
apply to American conditions. Most of the index 
numbers of commodity prices begin in the early 
nineties. 

It is hopeless, therefore, to attempt to go back 
earlier than 1890 in a comparison of this kind. 
The sharp rise in commodity prices in the United 
States commenced in 1897. The Wall Street 
Journal averages of stock prices may be said to 

77 



78 HOW TO INVEST 

go back satisfactorily to this date. Consequently, 
where we should have several 20- or 30-year 
periods for a comparison, we have simply the ex- 
perience of the past 15 years. 

During the past 15 years, it is easy enough to 
make a striking comparison. The Gibson Index 
Number which I planned in 1910, in order to 
continue in a way the Dun Index Number of 
Commodity Prices which was discontinued in 
1907, shows for the period, 1897-1912, an ad- 
vance of 66 per cent. The advance during the 
past year has been very rapid. Thus, the index has 
moved up from 106 to 120 from June, 1911, to 
June, 1912. My new international index number 
for the United States, England, and France, has 
advanced from 90 in 1896 to 135 in May, 1912; 
or 50 per cent. 

Commodity and Stock Prices Since 1897 

Let us compare this showing with the advance 
in the Wall Street Journal's average of 20 rail- 
way common stocks. In 1897 the average of high 
and low for the year was 58 and in June, 1912, 
120, which is an advance of 107 per cent. We 
may reason if we choose to, I suppose, that stocks 
have advanced 107 per cent, when commodities 



WHEN PRICES ARE RISING 79 

have advanced 66 per cent., but from such a com- 
parison as this he would be a foolish investor who 
undertook to buy stocks now on account of the 
effects of gold depreciation as evidenced by such a 
showing. There are several fallacies in such a 
comparison which we must overcome, or, at least, 
acknowledge. 

As Professor William G. Sumner used to say, 
"Given the major premise, the savage mind 
reasons very logically. You will generally find the 
fallacy packed away in the major premise." In 
other words, our mental digestions may be sound, 
but the facts with which we feed our judgments 
may not prove nourishing. Again, our reason- 
ing in a complicated financial problem may be ac- 
curate, but in the application lurk subtle dangers 
and very often the facts before us may be uncon- 
sciously selected by ourselves in such a way as 
seriously to mislead us in the application. 

My thought is that such a comparison as above 
between the advances in the prices of commodities 
and of leading stocks is in reality quite mislead- 
ing, and yet this is exactly the comparison which 
underlies much of the discussion which is going 
on in regard to the effects of gold depreciation. 
Undoubtedly, many investors are being led to 



80 HOW TO INVEST 

sell stable securities and to invest in unstable 
stocks. It is almost as heinous an act to cause 
investors to lose money by unfair, insincere, in- 
cautious or ill-considered advice as to destroy 
lightly a woman's religious faith. The two are 
acts from the same motive of irresponsibility and 
lead generally to great disappointment in the end. 

Twenty Railroad Common Stocks 

There are two fallacies in making a comparison 
of the advances in the respective prices of com- 
modities and of stocks. First, the stocks upon 
which the averages are based are selected. By 
this we mean among other things that the average 
investor would not have selected these 20 stocks 
in 1897. The 20 stocks in the list of the 
Wall Street Journal follow: Atchison; Baltimore 
& Ohio ; Canadian Pacific ; Chicago & North West- 
ern; Chicago, Milwaukee & St. Paul; Delaware 
& Hudson ; Erie ; Illinois Central ; Lehigh Valley ; 
Louisville & Nashville; Missouri Pacific; New 
York Central; Rock Island; Southern Pacific; 
Southern Railway ; Norfolk & Western ; Northern 
Pacific; Pennsylvania; Reading; and Union Pa- 
cific. 

A cursory glance at this list shows that by the 



WHEN PRICES ARE RISING 81 

test of time most of these corporations have 
achieved unusual success. Then why should we 
not attribute the 107 per cent, advance in these 
20 stocks to the fact that the higher prices have 
followed upon the heels of financial success ? Why- 
bring in gold depreciation at all? Or, if we de- 
cide to do so, as I think we should, how shall we 
differentiate how much of the advance to attribute 
to successful management, how much to growth 
of country and of special sections of the country, 
and, third, how much to gold depreciation ? These 
are questions worthy of careful study. 

Undoubtedly in this list of successful corpora- 
tions, the Wall Street Journal has made a happy 
selection. All that investors need to do, after all, 
is to purchase stocks of corporations which turn 
out successfully in the future. Following4his line 
of reasoning, why would it not prove to be a good 
policy to purchase the stocks in the Wall Street 
Journal's list? In commending the happy selec- 
tion of that excellent financial journal, this cau- 
tion should be left with the investor. This is 
fallacy, number two. It is true, I think, that some 
of the stocks have been dropped which were used 
in the averages of earlier years and new stocks 
have been substituted. Hence we are in danger 



82 HOW TO INVEST 

of basing our conclusions upon averages of dif- 
ferent things at different times. 

Just to illustrate the above points in contrast, 
I have picked out a few stocks, selected from the 
list of the Financial Review for 1897 which was 
published in 1898, and I have in the following 
table entered the quotations of June, 1897, to 
compare with June, 1912. 
Seven Investment Stocks in Good Standing in 1897 

Price Price 

June, 1897 June, 1912 

Chicago, Milwaukee & St. Paul 80 104 

New York Central & Hudson River 102 119 

Pennsylvania 105 124 

New York, New Haven & Hartford 170 135 

Illinois Central 98 128 

Chicago & North Western 113 137 

American Sugar 123 130 

Average 113 125 

In the above list which I have selected, repre- 
senting investment properties in 1897, and not 
speculative possibilities as were many of those 
quoted by the Wall Street Journal list, the gain 
in this period of excessive gold depreciation is only 
12 points, or say 11 per cent. To my mind the 
chances seem good that the average investor would 
have selected from my list rather than from the 
present list of the Wall Street Journal at that 
time. The singular rise in the Wall Street Jour- 



WHEN PRICES ARE RISING 83 

nal list comes from the inclusion of Canadian Pa- 
cific and the coal roads. Reasoning from averages 
is often fallacious and the application of the gold 
depreciation theory is not so simple as it appears 
to be on first consideration. 

To carry these comparisons one step farther, let 
us select another list to show the vicissitudes which 
overtake great corporations. In 1897 the chances 
of an investor buying the following list is good 
in comparison with many of the stocks on the pres- 
ent Wall Street Journal's list at that time. Some 
of the roads which have made great advances in 
the Wall Street Journal list were just emerging 
from failure and reorganization in 1897. 

Seven Active Low-Priced Stocks in 1897 

1897 1912 

Chicago Great Western 4 Reorganized since 

Lake Erie & Western 15 16 

Long Island 42 51 

Minneapolis & St. Louis 20 19 

Missouri, Kansas & Texas 12 27 

Missouri Pacific 17 38 

Wabash 5 Receivership 

Average 16 22 

Here is a gain of 6 points in 15 years, or 
0.4 per cent, per annum which reduces to 2^ per 
cent, per annum on the purchase price. Few divi- 
dends were paid on the stocks in this list. I have 
assumed that the average investor accepted his loss 



84 HOW TO INVEST 

in Great Western and Wabash philosophically 
without permitting more good money in assess- 
ments to follow the bad original investments. 
Moreover, we have ignored the carrying charges 
of 6 per cent, per annum, which if allowed for 
after deducting dividends of the earlier years, 
would have resulted in a net loss per annum. 

In a book such as this, which aims to present 
financial truth for the purpose of assisting invest- 
ors, such questions as the effects of gold deprecia- 
tion on the prices of securities cannot be too care- 
fully investigated. 

Varying Effect of Gold Depreciation 

The two examples given above show that the 
supposed theoretical effects of gold depreciation 
upon different selections of stocks are quite dif- 
ferent. In the case of the Wall Street Journal 
list, the effect, if we attribute the rise largely to 
the gold influence, seems large. But this list rep- 
resents extremely successful corporations. The 
western and southern groups have enjoyed phe- 
nomenal prosperity and the eastern coal roads 
have succeeded notably from the standpoint of 
profits. 

When we apply the theory to the eastern divi- 



WHEN PEICES AEE RISING 85 

dend-paying roads, little effect is noticed. When 
applied to a selection of low-priced stocks, no ef- 
fect is to be seen. The three selections represent 
the successful, the average, and the poorly blessed 
among the corporations. It is plain that the appli- 
cation of the gold depreciation theory is not easy. 
For the investor looking ahead, the practical ap- 
plication is extremely difficult. It seems wise, 
therefore, to consider the theory rather carefully. 
What are the economic sequences of an increasing 
supply of gold ? 

In an era of inflation with the prices of com- 
modities steadily rising after an era of falling 
or stagnant prices, things look too easy to the pro- 
ducer of commodities. Like the horse with short- 
sighted glasses, the earth looks nearer to him and 
the steed steps high. The recent tremendous out- 
put of securities on the part of the producing in- 
terests is a passing token of this fool's paradise 
in which business men are and have been living. 
Writing in August, 1907, for Moody s Magazine, 
the writer endeavored to emphasize an element 
which is fundamental to the situation to-day. 

"Readjustment of prices forces readjustment of 
wages ; and what is even more disturbing, readjust- 
ments of all calculations of probable profits in the 



86 HOW TO INVEST 

various lines of business, a veritable setting at 
naught of business judgment which is gained by 
business men, not by a superior knowledge which 
foresees the future, but by that slow selection by 
trial and failure personally among men, some of 
whom succeed notably because of a combination of 
conditions and qualities the very nature of which 
they themselves are often totally in ignorance. 
Working by a skill acquired through the use of 
averages, taught by an experience covering several 
years, business men, in some lines, have awakened 
to find losses where they supposed profits were as- 
sured. Unable to calculate nicely, whole industries 
have become over-extended. Over-production has 
resulted because sufficient allowance has not been 
made for the reduced purchasing power of the 
population on account of the increase in the cost 
of living. In addition to this, costs have been un- 
der-calculated through the wage element which has 
advanced although probably not to an extent com- 
mensurate with the increased cost of living. If the 
country to-day is standing on the verge of one 
of the greatest crises in its history, only by 
appreciating the extreme gravity of the situ- 
ation can we hope to escape the most disastrous 
effects.' y 



WHEN PEICES AEE RISING 87 

The Pendulum of Price Movements 

It is as true to-day as yesterday that miscal- 
culation is the mistress of uncertainty. Uncer- 
tainty when widely prevalent destroys confidence. 
Lack of confidence undermines business. This is 
the psychological train of consequences arising 
from gold depreciation. Tremendous losses oc- 
cur in one quarter and excessive profits in another. 
The pendulum of price movements tends to swing 
through wider and wider arcs. The causes of in- 
dividual movements are hard to analyze. Every- 
thing depends upon the future, and who knows 
when the movement may be reversed ? 

Let us consider the simple theory of the rela- 
tion of rising commodity prices to the supposed 
changes in the prices of stocks. The chain of eco- 
nomic sequences is supposed to be this : Increasing 
gold results in rising prices. Increasing prices of 
commodities result in an increasing rate of net 
profits on the present capital. The more heavily 
bonded at a low interest a corporation is at the 
commencement of the era of the "gold influence," 
the greater will be the advance in the common 
stock. All this seems plausible and is doubtless 
true, provided that the corporation is successful in 
holding the increasing net profits as a result of 



88 HOW TO INVEST 

the higher prices which can be exacted and does 
not lose much or all of the advantage (1) to labor 
by higher wages, (2) to the consumer by price 
regulation as in the railroads or by charter rates 
of fare as in the street railways, and (3) to the 
money lenders in higher interest on new bonds 
issued to pay for an extended system of expansion. 

Danger in Expansion 

Either proviso one or proviso two may counter- 
balance a large fraction of the advantage, and very 
important is proviso three that the corporation 
shall not expand with newly borrowed money, shall 
not venture too far into the fool's paradise of al- 
luring profits, shall not borrow too much new capi- 
tal at the new high interest to be spent in improve- 
ments at the new high prices for materials and at 
the new high wages for labor. Expansion of a 
corporation soon destroys the heritage of the gold 
influence. 

The dividend payers mentioned in my first list, 
Chicago, Milwaukee & St. Paul ; New York Cen- 
tral; Pennsylvania; New York, New Haven & 
Hartford ; Illinois Central ; and Chicago & North- 
western, have expanded greatly, and, consequently, 
have lost the advantage which they might have had, 



WHEN PRICES AEE RISING 89 

if the three provisos already mentioned had re- 
mained favorable. 

How the Roads Owning Coal Lands 
Have Profited 

Now, let me present a list of corporations which 
did not expand greatly because the coal lands on 
which their prosperity depends were purchased 
in a period of lower prices. 

June, 1897 June, 1912 

Central of New Jersey 79 375 

Chesapeake & Ohio 17 78 

Erie 14 35 

Delaware & Hudson 108 164 

Delaware, Lackawanna & Western . . 153 542 

Norfolk & Western 11 114 

Reading 21 168 

Average 58 211 

The roads above show an advance of more than 
250 per cent. The causes are gold depreciation 
producing a great increase in property values, a 
stable price policy and a lack of necessity to buy 
coal lands and improvements on a scale of rising 
prices and of higher interest rates in order to pro- 
vide for more than normal growth. 

Why Pennsylvania ; New York, New Haven & 
Hartford; New York Central, etc., my first list, 
failed to compare with the coal roads in point of 
advance is probably due to the tremendous expan- 



90 HOW TO INVEST 

sion of the former, in vast new terminals, electri- 
fication and the purchase of other properties. 
Should these roads enter a state of equilibrium in 
regard to expansion and should gold depreciation 
continue for 10 years more and should public serv- 
ice commissions permit increases in the rates, these 
roads, too, might benefit. 

In the above comparisons no account has been 
taken of dividends and rights. My next compari- 
son will throw light upon the following question 
which should be interesting to an investor. As- 
suming a property capitalized with half bonds and 
half stocks and earning 6 per cent, on stocks and 
5 per cent, on bonds, what should be the effects 
upon the yields of the stocks and bonds by a "gold 
influence" depreciating at the rate of 2J per cent, 
per annum? We should expect that the stocks 
would yield during the period of the depreciation 
of gold 6 per cent, plus twice 2 J per cent., and the 
bonds 5 per cent, less 2| per cent. ; in other words, 
10J and 2| per cent., respectively, after allowing 
for losses and gains in principal and increments. 

To illustrate the theory by statistics, I have se- 
lected 10 great railroads and figured out the total 
increments of this period, dividends, rights and 
appreciation or loss in market value. The rail- 



WHEN PRICES AEE RISING 91 

roads selected were Atchison ; Baltimore & Ohio ; 
St. Paul ; Great Northern ; Illinois Central ; New 
York Central; Northern Pacific; Pennsylvania; 
Southern Pacific; and Union Pacific. These are 
all successful corporations. 

Experience of two investments of $100 — one in 
the common stocks and the other in selected bonds 
of the same railroads : 

In stocks In bonds 

Original investment on Jan. 2, 1901. . $100.00 $100.00 

Value on Jan. 2, 1910 126. 10 91 .30 

Gain from appreciation of price ...... 26 . 10 Loss 8 . 70 

Dividends or interest paid during 9 

years 43.30 32.80 

Value of the rights of 9 years 30.20 

Total increments as above 99 . 70 24 . 10 

Average per cent per annum 11-1% 2 . 7% 

We find that our reasoning is borne out rather 
closely by the actual results of the calculation. 
Stocks have yielded 11.1 per cent, against 10.5 per 
cent, estimated and the bonds 2.7 per cent, against 
2.75 per cent, estimated. In other words, the net 
result is that stocks have yielded four times as 
much as bonds in the same railroads and from the 
same investment over the same period. 

How Industrial Stocks Have Appreciated 

It is probable that the railroads as a class have 
not secured a proportionate share in the appreci- 



92 HOW TO INVEST 

ation of stock values which should have followed 
prolonged depreciation of gold. Government regu- 
lation of rates is an important cause. The indus- 
trials are free from rate regulation. Let us turn 
to a list of 19 industrials which I have selected 
from the records of the Financial Review of 
1901. 

These industrials are obviously a selected class, 
since the Financial Review groups them under the 
head of "leading industrials." ISTor has an at- 
tempt been made to determine the value of the 
rights which have been distributed. The follow- 
ing table simply shows the experience of an in- 
vestor who placed $100 in the average of the 19 
issues in 1900 (or in 1901 in the case of Steel 
Common), and held these securities until June, 
1912. The dividends and appreciation in value 
of the stocks have been calculated. 

Original investment, June, 1900 $100 

Present value, June, 1912 136 

Appreciation in stock value $36 

Dividends received approximately 68 

Total additions from dividends and apprecia- 
tion 104 

Average annual rate of increment, 8.7 per cent. 

The industrial stocks selected are the following: 
American Car & Foundry ; American Cotton Oil ; 
American Sugar Refining; American Telephone 



WHEN PKICES AEE KISING 93 

& Telegraph Co. ; Brooklyn Union Gas ; Colorado 
Fuel & Iron ; Consolidated Gas ; Diamond Match ; 
General Electric; National Biscuit; National 
Lead ; New England Telephone & Telegraph Co. ; 
Pressed Steel Car ; Pullman Co. ; Standard Oil ; 
Swift & Co.; United Fruit; United States Steel; 
and Westinghouse. 

Some of these industrials have distributed valu- 
able rights. It is probable that the value of the 
rights would bring up the 8.7 per cent, average 
return to 11 per cent., which was the figure for 
the prosperous railroads, when all three factors 
were included. 

Stock and Bond Profits Compared 

It seems fair to assume that successful indus- 
trial corporations have been able to average 11 per 
cent, during this period of gold depreciation. The 
following calculation shows the relative advantage 
of investing in the stocks of industrial corporations 
as contrasted with investments in railroad bonds. 
Let us assume that commodity prices have ad- 
vanced 40 per cent, during the interval ; also, that 
a proper selection of industrials would yield 11 
per eent. annually. Fifteen years at 11 per cent. 
gives 165 per cent, for the increments and, con- 



94 HOW TO INVEST 

sequently, the total investment would have 
amounted to $265. 

The bond investment already referred to yielded 
2.7 per cent, and maintained the original invest- 
ment unimpaired in the gold standard. The 
amount is $141 in comparison with $265 for 
stocks. 

Now what may be said to be the relative ad- 
vantage measured in purchasing power rather than 
in the gold standard ? We may divide $265 and 
$141 by 140 to reduce the figures to ratios of pur- 
chasing power which compare with conditions pre- 
vailing when the investments were made. Obvi- 
ously, it is not fair to take 66 per cent., the total 
advance to date. I have taken 40 per cent, in or- 
der to asume a figure which corresponds to the 
advance which has occurred when we compare the 
averages of commodity prices over several years 
around the years 1897 and 1912. The ratio for 
stocks is 189 and for bonds 100, showing the pur- 
chasing power comparisons of the total amount of 
the investments, including appreciation, dividends, 
and rights. If now we deduct 100 to represent 
the purchasing power of the original investment, 
the balance leaves the total increments in purchas- 
ing power, namely, 89 per cent, increase for the 



WHEN PRICES AEE RISING 95 

stocks and per cent, increase for the bonds. 
This reduces to 6 per cent, per annum for stocks 
and per cent, per annum for the bonds. 

The Purchasing Power of Stock and Bond 
Earnings 

Thus, we see that the investor in stocks has pre- 
served his original investment unimpaired meas- 
ured in purchasing power (and not in the decep- 
tive gold standard) and has received in addition 
increments equivalent to 6 per cent, per annum in 
purchasing power. The investor in bonds by sav- 
ing all his interest payments and reinvesting 
would have been able to maintain his principal in 
purchasing power, but had he done this, he would 
have had no income. Measured in purchasing 
power, the investment in stocks shows 6 per cent, 
per annum better than the investment in bonds. 

This means that millions of dollars of property 
value have been transferred silently from bond- 
holders to stockholders during the past 15 years 
by this automatic, unconscious action on the part 
of the legal definition of a stock as distinguished 
from a bond through the hazard which exists in 
a standard of value resting upon one metal and not 
upon a plurality of the necessities of life. 



96 HOW TO INVEST 

The judgments of great financiers have heen 
set at naught. Trust funds have heen cut in two 
measured in purchasing power by the strict limita- 
tions requiring investments in bonds. One of the 
greatest financial problems of our day is uncovered 
in the above comparisons. 

Savings banks and trust funds are required by 
law to invest largely in bonds. Sooner or later, 
savings bank depositors are bound to become aware 
of the facts, and then they will continue to in- 
crease their withdrawals at an increasing rate for 
more remunerative investments elsewhere. The 
Postal Savings Bank will help to increase the rate 
of withdrawal, because the U. S. Government 
guarantees the original principal in the gold stand- 
ard. When withdrawals reach a point where sav- 
ings banks are obliged to sell bonds in large vol- 
ume, the price of bonds is likely to melt away as 
British Consols have been doing, and many sav- 
ings banks will reach a state of insolvency requir- 
ing dissolution. Something should be done to per- 
mit savings banks to invest in seasoned dividend 
paying stocks of roads in which they make bond 
investments in some proportion to permit 
hedging. 



WHEN PKICES AEE RISING 97 

Four Questions to Consider 

It is the duty of the writer to suggest possibili- 
ties which he cannot solve. By contemplating the 
possibilities, investors may avoid some of the pit- 
falls. Looking ahead, four points to keep in mind 
are the following: (1) Have the past effects of gold 
depreciation been wholly discounted? (2) If not, 
how much has been discounted? (3) Will gold 
depreciation continue and at what rate ? (4) How 
shall an investor select the corporations which will 
benefit, or how may he hedge the issue ? 

To my mind the past is history. The future 
is a problem of unexpected news. We shall know 
these points as they are only when they occur. 
They are like the weather and the "acts of God." 
They occur and we know not when or where. 
Hence, like La Place, we must reason by contem- 
plating the possibilities. Expanding the reason- 
ing, we have before us three principal possibilities : 
(1) a moderate increase in gold production; (2) 
a large increase; and (3) an excessive increase. 
Under (1) a moderate increase in gold produc- 
tion, the growth of the world's commerce and a 
further increase in prices would probably pro- 
duce a satisfactory adjustment. With the second 
condition, a large increase of gold for the next 10 



98 HOW TO INVEST 

years, stacks would be a purchase and bonds would 
be a poor investment. Under the third hypothesis, 
an excessive increase, neither stocks nor bonds 
would be good investments, because the political 
element would enter. 

An International Gold Commission, which the 
writer proposed in 1907 and President Taft 
recommended to Congress in 1912, would become 
a necessity in order to seek out the proper reme- 
dies. This would be forced upon legislating bodies 
throughout the world by the widespread insolvency 
which would occur among investment institutions 
of all classes holding bonds largely as investments, 
simply because falling bond quotations would make 
their assets less than their liabilities. During the 
past 10 years a considerable weakening has oc- 
curred in the surplus reserves of savings institu- 
tions all over the world owing to the considerable 
fall which has taken place in the quotations of 
bonds. 

Suggested Remedies for Excessive Gold 
Production 

Many legal remedies for the situation would be 
suggested, if the second or third condition de- 
velops. The simplest remedies follow; 



WHEN PRICES ARE RISING 99 

Allow savings banks to value all their bonds at 
par rather than at market price, to prevent in- 
solvency. 

Require all banks to keep a minimum reserve 
of 35 per cent, instead of 25 per cent, as now at 
central points and 20 per cent, everywhere else, 
with 75 per cent, of the reserve in gold. This 
would use up much gold and strengthen credit. 

Place a tax on the production of gold sufficient 
to retard production. This would require inter- 
national agreement. 

Adopt an optional multiple standard for new 
contracts, and quote gold in the multiple standard. 
Writing in The Independent in 1910 on the 
Remedy for the High Prices, I suggested the adop- 
tion of an optional multiple standard for wage 
contracts. This would tend to do away largely with 
strikes, because wages would fluctuate with the 
cost of living as declared daily by the United 
States Bureau of Standards. This proposal met 
with the approval of the Massachusetts Commis- 
sion on the Cost of Living, which says : u ~Eo spe- 
cific remedy for the situation exists, unless it be 
sought in the direction of a new standard of value. 
For many years the economists have been dis- 
cussing the possibility of that. Many of them urge 



100 HOW TO INVEST 

its creation by the framing of what they describe 
as a 'multiple standard.' It is hard to see how 
harm could come from giving official aid to such 
a standard for the use of borrowers and lenders 
who chose to adopt it." 

Finally, since the advance in prices is great- 
est in farm products, any revision of our banking 
laws which cheapens agricultural credit will tend 
to increase production and reduce prices. Such 
an attempt has been made in France. 

All these things are within the realm of possi- 
bility. What now seems probable is a moderate 
increase in gold production, checked sooner or 
later by increased use in the arts, increased utili- 
zation by the eastern nations as they develop under 
modern inventions, growth of commerce, legal 
regulations increasing the ratio of gold reserve to 
deposits in all banks and by an increasing cost 
of production for gold which will be caused by 
higher prices and wages. 

The Investor's Safest Course 

For the investor the safe course lies in ascer- 
taining the real property value at present prices 
behind his investment. Where both stock and 
bonds represent real property value, a division of 



WHEN PEICES AEE EISING 101 

one-half in bonds and one-half in stocks of the 
same corporations enables the investor to protect 
the safety of his funds. If the corporation bene- 
fits by gold depreciation his stocks will reap the 
benefit. If a crisis occurs with the ensuing wide- 
spread industrial liquidation from overproduction 
such as the world has seen with some regularity 
every 20 years, in 1873 and again in 1893, as 
a bondholder the income from his bonds will prob- 
ably continue, even if his stocks go down some- 
what in the general liquidation which occurs in 
advance of a great crisis. 

The central point is whether the near future 
will see such a world crisis or whether the flood of 
gold will prove sufficient to hold prices of commodi- 
ties and securities on a level without the old-time 
violent readjustments. What the situation will be 
it is impossible to predict. The investor must 
watch tendencies and developments in gold produc- 
tion and attempt to judge for himself what the 
extent of its influence will be. 



CHAPTER VI 

BONDS WITH A STOCK 
BONUS 

BY MONTGOMERY ROLLINS 

Author of 
"Municipal and Corporation Bonds," " Money and Investments," etc 



103 



CHAPTER VI 
Bonds with a Stock Bonus 

IT was in 1843 that Edward Kellogg hit 
upon the idea that "Anything that exists in 
perpetuity is valuable in exact proportion 
to the income it will yearly bring to its owners." 

Now, income is money or its equivalent. Money 
— because, in all enlightened countries, it is founded 
upon gold, in the final analysis — is a commodity 
just as much as coal or pig iron and, consequently, 
its exchangeable value as a commodity determines 
its value to the owner. Thus admitting that in- 
creased production of gold is one of the logical 
causes of the rise in living cost, it is not a far cry 
to see that the income to which Mr. Kellogg refers 
has a changeable value to the possessor in accord- 
ance with the abundance or scarcity of gold, the 
commodity upon which it is based. We will not 
attempt to argue, pro or con, as to the merits of 
the -over-production of gold theory, but, as the con- 
sensus of opinion is largely in its favor, we will 
base our conclusions thereon. 

The ordinary "shares of stock" — as Americans 

105 



106 HOW TO INVEST 

term them — and the English bond issue known as 
a debenture, which is, usually, an irredeemable 
affair, differ materially, in the form in which Kel- 
logg' s theory may be applied to them, because, in 
the first instance, the rate of income, i. e., the 
dividend, is not necessarily fixed, and may, very 
likely, if the corporation is a successful one, in- 
crease with the demands brought about by rising 
prices. For is it not a fact that earnings have gen- 
erally increased proportionally with the cost of 
living ? It is believable, therefore, that the share- 
holder may obtain, in one form or another, the 
equivalent of his needs. 

Redeemable and Irredeemable Bonds 

But, in the second instance — that of the irre- 
deemable bond with a non-changeable rate of in- 
terest — the matter must be approached from an 
entirely different standpoint; the argument, like- 
wise, applies to a redeemable bond with a fixed 
interest rate. There is no method by which in- 
come upon such bonds can be increased except by 
a reduction in the price of the principal. This, 
however, does not benefit the holder who has al- 
ready invested his money therein. The income 
upon an irredeemable bond or a share of stock is 



WHEN PEICES AEE EISING 107 

immediately determined by dividing the yearly 
income rate by the purchase price, less the amount 
of interest or dividend accrued. A security, of 
this class, paying 6 per cent, yearly, and selling 
at 150, yields an income of 4 per cent. At 120, 
it yields 5 per cent. 

But the price of a redeemable bond is computed 
in another way, for the reason that, whatever the 
cost of such a security, allowance must usually 
be made for its ultimate repayment at par. To 
illustrate, a bond falling due in 20 years, selling 
at par, and bearing 4 per cent, interest, returns 
that rate of income, as anyone will readily under- 
stand, but if it is desirable to increase the rate 
of income to 5 per cent., the price must drop nearly 
13 per cent. The longer the bond has to run the 
greater the shrinkage in price for the equivalent 
increased return in income. Time is a factor, 
here, but not in the case of issues that run in per- 
petuity. 

It is not a difficult proposition to understand, 
therefore, that any security with a fixed income 
will change in price in accordance with the pur- 
chasing value of that income, and that bonds will 
be affected in price, more or less, according to the 
length of time which they have to run in obedi- 



108 HOW TO INVEST 

ence to this perfectly obvious rule of reasoning, 
and that stocks will do likewise unless their divi- 
dend rates advance in sympathy with the advance 
in prices. 

Other extraneous conditions are not taken into 
consideration in this argument, prices of securities 
being treated from the standpoint of cost of living 
only. 

The Advantage of Short-Term Bonds 

If the argument is clear and accepted, then it 
behooves one, in the time of rising prices, to own 
short-time bonds, if he have any at all — either that 
he may hold the same until maturity, and thus 
reinvest at a better rate of income, or that he may 
sell them at prevailing prices while yet the pin- 
nacle of rising living prices has not been reached. 
It would benefit him but little to sell, at a pinnacle 
of high prices, because, whenever he sells, he must 
always expect to accept, everything else being 
equal, prices dependent upon the income value. 

During the past few years, and particularly 
just previous to our 1907-8 panic — which the 
writer believes to have been nothing more than a 
banking flurry — much difficulty was experienced 
in the placing of long-time low-rate bonds, and 



WHEN PRICES AEE RISING 109 

our corporations were hard put to it to finance 
their immediate needs, except by the hand-to- 
mouth expedient of short-time notes with interest 
returns commensurate with reigning prices. Pur- 
chasers were easily found, by this method, and 
hundreds of millions of dollars worth were sold. 

Presumably this buying of short-time notes was 
made possible by the crying need of a better rate 
of interest than obtainable from new issues of 
longer time bonds. The low figures at which the 
same grade of bonds then outstanding were quoted 
in the market, formed too great a contrast to the 
higher prices at which the corporations were try- 
ing to sell new issues to permit of the latter being 
salable. 

The writer thinks that, unconsciously, the in- 
vestor, in selecting this temporary form of security, 
builded better than he knew, providing it was dur- 
ing a period of rising prices. It proved to be the 
case, for it enabled him, in a short time — 1 to 3 
years — to get possession of his principal again, 
and to reinvest it at an increased rate stimulated 
by increased commodity prices. 

This argument may be continued with good 
reasoning and benefit so long as the cost of living 
continues to advance ; but if, upon the other hand, 



110 HOW TO INVEST 

we should, as they say in electrical plants, reach 
our "peak load" and then pass through a long 
period of declining prices in the world's markets 
of commodities, the investor would be equally bene- 
fited to have purchased very long time fixed inter- 
est-bearing securities at the low prevailing quota- 
tions contemporary with the "peak load" time of 
commodity prices. 

This argument, then, if a logical one, which the 
writer believes it to be, seems to offer to the man, 
with cash in hand, two forms of investment: the 
one, short-time issues, that the principal may be 
periodically returned at certain intervals; the 
other, equities rather than mortgages, meaning, 
thereby, shares of stocks rather than bonds — upon 
the principle that the dividend rate is not neces- 
sarily a fixed one, and that it may advance in ac- 
cordance with his needs. 

Stocks as an Investment 

But against this last must be entered a few 
possible dangers. It may be, for instance, that 
labor troubles or too pernicious legislation and 
government activity may so curtail the energies 
of our corporations as to make it either impos- 
sible or dangerous to raise dividends. 



WHEN PKICES AEE KISING 111 

An investor of much experience, in touch with 
the great business highways of life, has recently 
declared, having particular reference to the dy- 
namic conditions displayed in the Lawrence strike, 
that he purposes, from now on, to place his money, 
if in industrials at all, in such that employ the 
minimum of labor and the class of labor as far 
removed as possible from the turbulent kind that 
hails from southern Europe and more distant Asia. 
This might mean, for example, hydro-electric 
propositions, which employ a very high class of 
labor, particularly the educated kind, in many 
departments, and, certainly, minimum of labor in 
proportion to the money value of its output. 

The writer is rather inclined to believe that so 
long as we continue upon our headlong career of 
advancing the cost of living, and then the price of 
labor, in endless repetition, the short-time note 
plan of investment has the better of the argument. 
At least, if the investment has been wisely selected, 
the owner can have his money again in hand, every 
now and then, and can take a breathing spell, 
scan the horizon, and size up the situation, as it 
were, before reinvesting. But, if he has purchased 
a long-time investment, either in the form of bonds 
or stocks, he must wait, in the first instance, many 



112 HOW TO INVEST 

years before the return of his principal, and, in 
the other case, obtain it only by a sale of the se- 
curity at a probable shrinkage from its original 
cost, which would apply, with equal force, to a re- 
deemable long-time investment, if he desired to 
realize upon it before maturity. 

The investment, which is of short maturity, 
may be held until paid, or, if sold, the shrinkage 
is but a fraction of a per cent., because, the con- 
verse of the long-time bond, as explained further 
back, the shorter the investment the less the 
shrinkage in price to increase the yield from its 
normal yield at par. An illustration is that of a 
six months' note paying 4 per cent, at par; at 99^ 
the income rate will be raised to 5 per cent. — a loss 
of only | per cent. 

An Income to Meet Your Needs 

The reader must accept one fixed immutable 
law, which is this: that a man's income must fit 
his needs. If he has been accustomed to living, 
with all due regard for economy, upon a 4 per 
cent, return upon his principal, and the cost of 
living advances 25 per cent, he must have a 25 
per cent, increase in his income, or a 5 per cent, 
return in place of 4 per cent. And he will get 



WHEN PEICES AEE RISING 113 

it — "he" being used in the broad sense of the in- 
vesting public. He must have the necessities of 
life, and will, consequently, refuse securities pay- 
ing him but 4 per cent., and will insist upon, and 
certainly obtain, the better 5 per eent. rate. 

The keynote of the whole situation is in the 
thought that countless thousands of small investors 
demanding, say, a 5 per cent, income in place of 
4, will be likely to see their wishes fulfilled, and 
their demands, like the advance of a horde of lo- 
custs, may not be stayed. It is this multitude of 
small investors, acting in unconscious unison, 
which is the deciding factor in the price of se- 
curities. 

One has but to observe the market prices of our 
standard investment stocks, such as that of the 
Pennsylvania Railroad — stocks to which no im- 
mediate speculative value is attached — to see 
what a firm grasp upon the situation the public 
has had, and still has. Perhaps, as never before, 
in the last decade, the small investor has realized 
the meaning of "net return," and its meaning has 
been emblazoned upon his mind with great dis- 
tinctness, because of the pinch of necessity beset- 
ting him upon all sides, attributable to the rise in 
living expenses. 



114 HOW TO INVEST 

However stock market manipulation — that 
power which is credited with ability to advance or 
lower stock exchange prices at will — may have 
been resorted to in order to lift prices of stocks of 
the "Simon pure" investment class, they have, 
each time, reached a fixed level which it seems 
impossible for them to have crossed. And that 
fixed level is the base line determined by income 
necessity and income value, all so clearly laid 
down by one Kellogg nearly three-quarters of a 
century ago. 

The Investor Who Favors First 
Mortgage Bonds 

But let us imagine the investor of a somewhat 
stubborn disposition and not inclined to forsake his 
traditional and laudable habit of preferring the 
mortgage — particularly the first mortgage — to the 
equity, or even the unsecured note — in other 
words, genuine prior lien bonds to floating debts 
and shares of stock. Suppose him to meet our 
theories with the praiseworthy argument that the 
first-mortgage bond is the safest form of invest- 
ment in any given property, and that, in case of 
disaster, and the property sold under foreclosure, 
there might be nothing left for the investor in its 



WHEN PEICES AEE RISING 115 

notes or shares after satisfying the claims of the 
bondholders. 

There is no contrary answer to make him, and 
he will smile complacently and dash our theories, 
because he will read in our faces a reflection of 
his own deep-rooted principles that no increase of 
income to meet the cost of living is economically 
sound if obtained at the cost of a like risk to the 
capital. 

Bonds With a Stock Bonus 

Just at this juncture, however, we advance an- 
other thought which runs this wise : 

He might buy bonds which carry with them a 
"bonus" of stock. Thus he could still have his 
first charge against the property in the form of a 
fixed rate of interest with which he would have to 
put up, during sunshine or storm of living ex- 
penses, but, on the other hand, he would have a 
partnership interest in the company, costing him 
nothing, which would help out his living, if the 
enterprise prospered to a dividend-paying degree. 

And we are not at all embarrassed or confused 
when he desires to know how and where such com- 
binations are to be had. We will explain : 

"Going" propositions with established earnings 



116 HOW TO INVEST 

enjoy a credit and reputation by which they can 
usually obtain necessary funds for extensions, etc., 
without offering any extra inducements such as 
the stock bonus, although, during the last decade, a 
considerable inducement in this line has been 
given by some of our best and thriftiest corpora- 
tions in the form of "convertible" issues. But 
that is another subject, and aside from the point 
here. 

Financing New Enterprises 

When a new enterprise is to be launched, and 
capital invited to develop a property, for the suc- 
cess of which prospective investors are dependent 
upon correct estimates of costs and earnings by ex- 
pert engineers and bankers, the matter looks differ- 
ent. 

It is becoming more and more the custom of the 
day to make bond issues, upon such as the last — 
construction propositions, they are called — equal, 
or nearly equal, in face value, to the money ex- 
pended on the property. 

Our keen-minded investor sees his opportunity 
here, and suggests that if he buy such a bond he 
would be taking all the risk and the other fellows 
all the profit. 



WHEN PEICES ARE EISING 117 

Not quite that, although we must admit that 
it appears so at first glance. But we will 
see: 

Let us create an imaginary company — it may be 
a hydro-electric, a coal mining, or a manufactur- 
ing enterprise — with $5,000,000 in first mortgage 
bonds, and an equal par value of stock ; plant and 
all complete to cost $4,500,000. The bonds are all 
sold to bankers at 92, or $4,600,000, leaving $100,- 
000 cash in the treasury of the company. Later, 
they are sold to the public at 95, giving 3 per 
cent, cash profit to the bankers, which is deemed 
a fair charge for the years they may have put 
into discovering the possibilities, and bringing to 
fruition all the countless details of the proposition. 
Besides which the machinery of their house, the 
good-will of its clientele, and so on must be paid 
for. 

So we may be said to start even, at this point. 

What the Banker Gets for His Work 

The investors have provided the funds to set 
our plant in motion, and for a small balance for its 
treasury. The bankers have been paid for their 
valuable services, so we may now consider who is 
to get that $5,000,000 in stock. The investors 



118 HOW TO INVEST 

want the continued and indefinite interest of the 
bankers, who are experienced in such things, to 
look after the management of the plant, and to do 
further financing, if needed. But they must be 
paid for this work ; it will take skill, patience, and 
energy, and the laborer is probably worthy of his 
hire, in this instance. So we believe him to be 
entitled to not less than half of this stock, which, 
at the moment, has no real value, because the prop- 
erty is not finished and thus not earning anything 
with which to pay dividends, and, furthermore, 
the stock represents no cash investment. 

The Investor's Rightful Share 

But the other half? To the bondholders to be 
sure ! A "stock bonus" of 50 per cent. — 5 shares 
of stock with each $1,000 bond. And why not? 
Is it not a fair division of the spoils, one-half to 
those who give the money and take all the risk, and 
a like portion to those who give their time and look 
after the management ? The bankers, with a half 
interest, will have an incentive to make the com- 
pany prosper. But some of their holdings may 
have to go to men of influence who are wanted as 
directors, or in other ways, too many to mention 
here — perhaps to some promoter who may have 



WHEN PEICES AEE RISING 119 

first brought the plan to the attention of the bank- 
ing house, or helped in securing the water rights, 
and what not. 

Our investor looks incredulous. We surmise 
that he can recall issues of a similar nature where 
no bonus was offered, where the bonds were sold on 
the reputation of the banking house, one of those 
whose name alone will sell almost anything with- 
out any such inducement as we have outlined. 
But his smile gives way to a set expression, as he 
questions, for the first time, its right to take all 
the stock — all the profit — and leave its customers 
with all the risk. We watch him as he grows to 
realize the ethics of the situation, and are some- 
what shocked at his language, as he finally ex- 
claims : 

"They have hogged it all." 

He does not need to explain to us that he owns 
some bonds which he now believes should have 
been accompanied by some stock. His few forcible 
words tell all that. But we hasten to explain that 
if any of his bonds are on properties that were 
completed, and showing earnings or closed con- 
tracts for profitable business, when he bought them, 
they had passed through the incubator period 
of construction, and the other fellow, who had car- 






120 HOW TO INVEST 

ried them during that time — and not he — was 
entitled to the bonus. 

Preferred and Common Stock 

We further explain that the form of capital- 
ization of our imaginary company is but sug- 
gestive; that preferred stock might be used in 
place of bonds, or the stock divided into common 
and preferred; that the latter might be much 
smaller in amount than the common, and might 
be used to pay certain promoters who had dis- 
covered the opportunity for the enterprise, and 
who had first secured control of the necessary 
lands. 

He sees that the capital arrangement is a mov- 
able one, and also grasps our idea that this very 
feature may make for such a division of the stock, 
that a lesser proportion than 50 per cent, with 
the bonds might be fair and just — 40, 30, or even 
20, in some instances. 

But however much of our argument may have 
been hazy to him, there is now one point that 
stands out as clear as a burning desert sun, that 
on a "construction proposition," there must always 
be such a division of the securities that they will 
represent a proper balance between investment on 



WHEN PEICES AKE RISING 121 

the one part, and promotion, responsibility, and 
management upon the other. 

Our cautious investor is not, however, to suc- 
cumb without a parting shot, which we have known 
well that we could not escape — the propriety of 
stock issues, except against values. 

Legitimate Chances for Large Returns 

A big question. One upon which pages might 
be written, for or against. We can only take 
refuge beneath the sweeping claim that if such a 
principle as limiting one's profits to a savings bank 
rate — the elimination of all speculation from en- 
terprises — had been rigidly enforced in America 
the past hundred years, but little development 
would have resulted. We even now might not be 
connected by rail with the Pacific Coast. Pioneer- 
ing in the field of finance, with its attendant risks, 
must offer large prospective profits, or why should 
one chance them ? Would mining for the precious 
metals — in which probably more money has been 
lost than made — attract capital if one's profits were 
to be limited to 4 per cent. ? 

No ! there are enterprises and enterprises ; some 
which are assured successes from their inception, 
but many others to which promoters and capital 



122 HOW TO INVEST 

would never turn if not allowed the speculative 
inducement of stock without initial value and 
cost. But, on the whole, we imagine that the world 
is the better for it, because of the many con- 
veniences of life and the remarkable progress of 
civilization which may not be fully accounted for 
in any other way. 

Three Methods of Increasing Your 
Investment Income 

Finally, then, there appear to be three methods 
by which the distracted investor may obtain some 
relief : 

First: The short-term security, paying more 
than long-time bonds; rates compatible with the 
exigencies of the moment. 

Second : The business or partnership end, in the 
form of stock, which, if of the investment class, 
should also be upon an income basis commensurate 
with the times. 

And, third: The combination bond and stock 
bonus plan, which, if wisely selected, should offer 
reasonable security, and give one the first-mortgage 
claim upon the property, while permitting of a 
participation in the business profits expected to 
accrue through the shareholdings, and which would 
go to pay the bond interest. 



CHAPTER VII 

CONCLUSION 

BY G. LYNN SUMNER 
Editor " Securities Review " 



123 



CHAPTER VII 

Conclusion 

In gathering information as a basis for the 
choosing of investments it is essential above all 
else that the material be drawn from impartial 
and unprejudiced sources. This fact was kept 
foremost in mind in gathering the material for 
this book. Those who prepared the preceding chap- 
ters are universally recognized as profound stu- 
dents of economic and financial conditions, men 
whose conclusions are invariably drawn from a 
careful analysis of conditions as they exist. 

The basic facts upon which all the authorities 
represented in this book agree may be briefly sum- 
marized as follows: 

1. Commodity prices in general have advanced 
approximately 50 per cent, since 1896. In other 
words, the gold dollar has depreciated in buying 
power 33 per cent, in 16 years. 

2. The chief cause of this depreciation has been 
the steadily increasing production of gold and the 
resultant increased amount of gold in circulation. 

3. With improved mining and milling methods 

125 



126 HOW TO INVEST 

and the probability of the discovery of new fields, 
it seems certain that the production of gold will 
continue to increase in the future, with a corre- 
sponding depreciation in its purchasing power. 

If these conclusions be true, the situation is one 
of tremendous importance to investors, for with 
the value of capital depreciating it must naturally 
follow that those forms of investment which yield 
fixed rates of income and at maturity return 
merely the par value of the principal must also 
shrink in value. 

Therefore, when the Securities Review was ar- 
ranging to give to the public the information which 
this book contains, we decided that, authoritative 
as these articles are, standing by themselves, we 
should endeavor to give them, if possible, an even 
broader substantiation by submitting the con- 
clusions they contain to a referendum of those best 
in position to verify the facts. 

No body of men in this country has made a 
more thorough study of prevailing economic and 
financial conditions than those who head or are 
connected with the Departments of Economics in 
our colleges and universities. In their collegiate 
work, and as members of the American Economic 
Association, they have been leaders in the devel- 



WHEN PEICES ARE RISING 127 

opment and advancement of our great business and 
financial policies. This is best evidenced, perhaps, 
by the fact that nearly every important investi- 
gating commission appointed by the federal gov- 
ernment to study commercial and financial prob- 
lems has been drawn in part from the ranks of 
our political economists. 

The Securities Review, therefore, turned to this 
same body of men because it believes that they 
have invariably drawn their conclusions after care- 
ful intimate study and from an impartial and 
unprejudiced standpoint. 

With the preceding chapters of this book as a 
basis, we submitted the following questions to fifty 
economists, taking their names at random from 
the membership of the American Economic Associ- 
ation: 

The Three Questions Asked 

1. Do you believe the increased gold supply is 
the basic cause of the present high cost of living ? 

2. Do you believe the general price level will 
continue to advance in the future ? 

3. What form of investment do you consider 
most desirable in a period of rising prices ? 

A few of those replying requested that their 



128 HOW TO INVEST 

names be not used, but we present here the replies 
of 32 economists, including many who are uni- 
versally recognized as authorities upon the sub- 
ject. That the verdict may be absolutely fair we 
present, of course, all the views expressed, regard- 
less of whether they agree or take issue with the 
principle advanced. A summary of the opinions 
follows the individual expressions. 

Do You Believe the Increased Gold Supply 

is the Basic Cause of the Present 

High Cost of Living ? 

Irving Fisher, Professor of Economics, Yale 
University : 

"Yes." 

Joseph French Johnson, Dean of the School 
of Commerce, New York University: 

"Yes." 

Willard C. Fisher, Professor of Economics, 
Wesleyan University: 

"Yes." 

Henry R. Seager, Professor of Economics, 
Columbia University: 

"Yes." 

E. W. Kemmerer, Professor of Economics, 
Princeton University: 



WHEN PRICES ARE RISING 129 

"Yes, the chief cause." 

John T. Holdsworth, Dean, School of Eco- 
nomics, University of Pittsburgh: 

"Yes." 

Lee Galloway, School of Commerce, New 
York University: 

"I do." 

Cheesman A. Herrick, Girard College: 

"No. No one cause can be singled out as basic." 

I. Grinfeld, Columbia University: 

"If by 'high cost of living* you mean high prices, 
my answer is Yes?' 

Walter E. Clark, Department of Economics, 
The College of the City of New York: 

"Yes." 

W. G. Hastings, College of Law, University of 
Nebraska : 

"I do not." 

Lewis H. Haney, School of Economics, Uni- 
versity of Texas: 

"The question suggests the danger of confusing 
'cost of living* with 'prices.' 'Cost of living' may 
be high without 'general prices' being high, for 
the average man's living immediately depends on 
relatively few things. The application of the dis- 
tinction in the present is this: There has been a 



130 HOW TO INVEST 

general rise in prices due to increased gold sup- 
ply; and also a further rise in cost of living due 
to increased population and an increasing strain 
on natural resources. Prices of food stuffs, etc., 
have risen most. The present high 'cost of liv- 
ing' has two basic causes: (1) Tardiness of ad- 
justment in wages and salaries to a general rise 
in prices caused by increased gold supply. (2) 
A growing realization of the limitation of our land 
supply finding expression in higher prices of food- 
stuffs, etc., and higher rents." 

Geo. G. Groat, Ohio Wesleyan University: 
"It is one of the chief causes." 
M. T. Copeland, New York University: 
"I believe that the increased gold supply is the 
basic cause of the present high cost of living. The 
growth of population has tended to enhance the 
price of foodstuffs and the tariff keeps the price 
level higher here than abroad. But the increased 
output of gold is, I think, the fundamental 
cause." 

W. F. Gephart, Ohio State University: 
"It is the basic cause of the present high prices, 
not the basic cause of the real high cost of living." 
John Edwin Brindley, Professor of Econom- 
ics, Iowa State College: 



WHEN PKICES ARE RISING 131 

"It is one of the important causes. I do not 
believe it is strictly scientific to say that any one 
cause is basic when speaking of so complex a phe- 
nomenon as the high cost of living." 

Francis H. Bird, University of Wisconsin: 

"I believe it is one of the causes." 

Augustus 0. Bourn, Columbia University: 

"Yes." 

J. E. Hagerty, Ohio State University : 

"It is one of several causes." 

H. J. Davenport, University of Missouri: 

"Yes." 

Frank H. Hankins, Clark University : 

"Yes." 

Edward M. Arnos, Department of Political 
Economy, Olivet College: 

"If you mean by 'basic,' one of the causes, evi- 
dence indicates that such is the case." 

Frank T. Carlton, Professor of Economics, 
Albion College: 

"It is one of the important causes, but not the 
sole cause." 

Albert S. Bolles, Haverford College: 

"I do not. The rise in prices can be more easily 
explained in other ways." 

A. G. Fradenburg, Adelphi College: 



132 HOW TO INVEST 

"It is one of the causes. I should hardly care 
to call it the basic cause." 

Fred It. Fairchild, Assistant Professor of 
Economics, Yale University: 

"Yes, the most important cause, although 
other causes have helped to produce the result" 

Everett W. Goodhue, Colgate University: 

"Yes." 

Eoyal Meeker, Department of Economics, 
Princeton University: 

"Yes, although the higher scale of living has 
perhaps an equally great influence." 

C. C. Huntington, Department of Economics 
and Sociology, Ohio State University : 

"It is an important cause, but not the only one. 
The psychological factor may be mentioned." 

J. L. Gillin, Department of Political Economy 
and Sociology, State University of Iowa: 

"In part, yes. It is also partly due to the in- 
creasing demand for our products both at home and 
abroad. The gold supply has its effect, however, 
in that it increases the price of commodities while 
wages and salaries respond to this increase of 
money less rapidly." 

Rockwell D. Hunt, Department of Economics 
and Sociology, University of Southern California : 



WHEN PRICES ARE RISING 133 

"Yes, but by no means the sole cause." 
H. 0. Allison, University of Missouri: 
"It is one of the basic causes." 



Do You Believe the General Price Level 
Will Continue to Advance in 
the Future? 

Irving Fisher, Professor of Economics, Yale 
University : 

"Yes." 

Joseph French Johnson, Dean of the School 
of Commerce, New York University : 

"Probably for 10 years." 

Willard C. Fisher, Professor of Economics, 
Wesleyan University : 

"Yes." 

Henry R. Seager, Professor of Economics, 
Columbia University: 

"Not indefinitely. Higher general prices means 
higher costs to gold producers. This in time will 
check gold production and restore the equilibrium." 

E. W. Kemmerer, Professor of Economics, 
Princeton University: 

"Yes, for some time, although, as in the past, 



134 HOW TO INVEST 

there are liable to be frequent interruptions and 
temporary declines." 

John T. Holdsworth, Dean, School of Eco- 
nomics, University of Pittsburgh: 

"This depends upon gold mining processes and 
the possibility of opening up new fields." 

Lee Galloway, School of Commerce, New 
York University : 

"It will until the cost of producing an ounce 
of gold overtakes the profits due to mining 
it." 

Cheesman A. Herrick, Girard College: 

"I do not." 

I. Grinfeld, Columbia University: 

"If gold remains the monetary standard, and if 
the production of gold keeps on increasing, the 
price level is likely to become still higher than 
it is at present." 

Walter E. Clark, The College of the City 
of New York: 

"Yes." 

W. G. Hastings, College of Law, University 
of Nebraska: 

"I do not." 

Lewis H. Haney, School of Economics, Uni- 
versity of Texas: 



WHEN PEICES AEE KISING 135 

"I have not the special knowledge necessary to 
even hazard an opinion on the question. It would 
be my guess that the rate of advance will be much 
less in the future." 

Geo. G. Groat, Ohio Wesleyan University: 

"I am inclined to think it will." 

M. T. Copeland, New York University: 

"I believe that the price level will continue to 
advance for a period of years, but at a constantly 
declining rate." 

W. F. Gephart, Ohio State University: 

"Somewhat, but not continuously nor at the 
same rate of increase as in the past." 

John E. Brindley, Professor of Economics, 
Iowa State College: 

"I think the tendency will be in that direction, 
although I do not expect to see prices advance as 
much in the next 10 years as during the last 10 
years." 

Francis H. Bird, University of Wisconsin : 

"Such seems to be the tendency." 

Augustus O. Bourn, Columbia University: 

"Yes." 

J. E. Hagerty, Ohio State University: 

"Yes." 

H. J. Davenport, University of Missouri: 



136 HOW TO INVEST 

"Yes, but very much more slowly." 
Frank H. Hankins, Clark University: 
"In all probability, since it seems very likely 
that the gold supply will continue to run ahead of 
current demand, relatively. The increase in bank- 
ing and credit facilities makes it possible for 
smaller and smaller amounts of gold to carry on 
greater and greater amounts of business.' 

Frank T. Carlton, Professor of Economics, 
Albion College: 

"With the increasing supply of gold the price 
level will continue to rise unless other forces 
counteract the effect of the gold supply." 
Albert S. Bolles, Haverford College: 
"It may. The rise is one of the results of over- 
capitalization of several very important kinds of 
business and will continue until this condition of 
things has changed. When the inflated capitals 
are reduced through legal or other ways then prices 
will begin to decline generally." 

A. G. Fradenburgh, Adelphi College: 
"I do not. I think the present level of prices 
will continue for some time." 

Fred. R. Fairchild, Assistant Professor of 
Economics, Yale University: 

"I do not wish to make any prophecy." 



WHEN PRICES ARE RISING 137 

Everett W. Goodhue, Colgate University: 

"Yes." 

Royal Meeker, Department of Economics, 
Princeton University: 

"No. The cost of mining gold wilJ eventually 
check its output." 

C. C. Huntington, Department of Economics 
and Sociology, Ohio State University : 

"These things tend to move in cycles. Symp- 
toms indicate a decline in the near future." 

J. L. Gillin, Department of Political Economy 
and Sociology, State University of Iowa : 

"Yes. With the lessened use of money, and the 
increased use of other things for money ; with the 
growing demands of our people for luxuries as 
well as for the necessities of life there is bound 
to be a growth in cost of living as measured by 
money as well as really." 

Rockwell D. Hunt, Department of Economics 
and Sociology, University of Southern California : 

"Yes, very slowly and with considerable vacil- 
lation; the price level may even decline tem- 
porarily." 

H. 0. Allison, University of Missouri : 

"Yes." 



138 HOW TO INVEST 

What Form of Investment Do Yotj Consideb 

the Most Desirable in a Period of 

Rising Prices ? 

Irving Fisher, Professor of Economics, Yale 
University : 

"Stocks rather than bonds, but all investments 
are insecure — stocks because of the ordinary risks 
of particular businesses, and bonds because of the 
risk of a fall in the purchasing power of gold." 

Joseph French Johnson, Dean of School of 
Commerce, New York University: 

"First: Railroad and good industrial stocks. 
Second: Real estate and farm land." 

Willard C. Fisher, Professor of Economics, 
Wesleyan University: 

"Among securities, stocks; otherwise, direct 
business enterprise." 

Henry R. Seager, Professor of Economics, 
Columbia University: 

"Stocks rather than bonds." 

E. W. Kemmerer, Professor of Economics, 
Cornell University: 

"Conservative types of investment in which the 
investor participates in the added money profits 
arising from rising prices and rising interest 
rates." 



WHEN PEICES ARE RISING 139 

John T. Holdsworth, Dean, School of Eco- 
nomics, University of Pittsburgh: 

"Short term bonds, if safety is the first consid- 
eration in the investment." 

Lee Galloway, School of Commerce, New 
York University: 

"Short time paper." 

Cheesman A. Herrick, Girard College: 

"Mortgages and bonds." 

I. Grinfeld, Columbia University: 

"Stocks, especially industrials." 

W. G. Hastings, College of Law, University 
of Nebraska: 

"Real estate and securities based on it not run- 
ning too long." 

Lewis H. Haney, School of Economics, Uni- 
versity of Texas: 

"Certainly not one which, like endowment life 
insurance or bonds, brings a relatively fixed num- 
ber of dollars at the end. What will be most de- 
sirable depends upon the character of the rise in 
prices. If it is so general and equal as to indi- 
cate a mere decreasing value of money, invest- 
ment in any industry which produces for a lasting 
market would do — assuming equally efficient man- 
agement, etc. But if certain prices advance first 



140 HOW TO INVEST 

and fastest, indicating special limitations on sup- 
ply, etc., the largest returns are to be sought in 
such industries. Of late years, farm lands, and 
stocks of corporations controlling valuable nat- 
ural resources (oil, coal, water power, timber, 
etc.), seem to be the logical money makers." 

M. T. Copeland, New York University: 

"Inasmuch as there is still more or less of the 
speculative element in all classes of investment, I 
am not ready to generalize on this point For 
the average man an investment in some security, 
the stability of which has been proven, seems to 
me advisable. Discrimination is necessary in each 
class." 

W. F. Gephart, Ohio State University : 

"Stocks." 

John E. Brindley, Professor of Economics, 
Iowa State College: 

"Good real estate loans, first mortgage bonds 
and securities of that class." 

Francis H. Bird, University of Wisconsin: 

"Stocks." 

Augustus O. Bourn, Columbia University: 

"The ownership of equities and not bonds." 

J. E. Hagerty, Ohio State University: 

"Cannot answer this briefly." 



WHEN PEICES AEE KISLNTG 141 

H. J. Davenport, University of Missouri: 

"Property of some sort — e. g., lands and com- 
mon stocks." 

Frank H. Hankins, Clark University: 

"Industrial stocks. Such companies are in po- 
sition to advance their prices and maintain or 
even increase their profits." 

Edward M. Aritos, Professor of Political 
Economy, Olivet College: 

"Other things being equal, it would seem that 
land would be the best investment in a period of 
rising prices." 

Albert S. Bolles, Haverford College: 

"Railway securities with respect to the next 
advance. They may fall somewhat, but are sure to 
go higher ultimately." 

A. G. Fradenburg,, Adelphi College: 

"Stocks in good industrial plants." 

Fred. E. Fairchild, Assistant Professor of 
Economics, Yale University: 

"Other things being equal, stocks are more desir- 
able than bonds during a period of rising prices." 

Everett W. Goodhue, Colgate University: 

"It is a little difficult to say, but I am inclined 
more and more toward investment in good agri- 
cultural land." 



142 HOW TO INVEST 

Royal Meeker, Department of Economics, 
Princeton University: 

"Impossible to say." 

C. C. Huntington Department of Economics 
and Sociology, Ohio State University : 

"High-grade short-term bonds, or deposits in a 
safe bank, until the period of depression so that 
funds may be available then for good investments 
at low prices." 

J. L. Gillin, Department of Political Economy 
and Sociology, State University of Iowa : 

"Real estate mortgages, especially farm mort- 
gages. Next, industrials based on good sound 
business in the production of goods which are 
staples. Next, railroad securities, especially bonds 
of roads which are soundly and firmly established." 

Rockwell D. Hunt, Department of Economics 
and Sociology, University of Southern California : 

"Western lands and securities connected di- 
rectly or indirectly with the soil and its produce." 

H. O. Allison, University of Missouri : 

"Stocks and low-priced farm lands." 
Summary 

Of the 32 economists answering the first ques- 
tion, "Do you believe the increased gold supply is 
the basic cause of the present high cost of living ?" 



WHEN PKICES AEE KISING 143 

16 reply definitely in the affirmative; 13 more 
agree that it is the chief cause or one of the chief 
causes, though other factors have contributed. 
Three answer definitely, "No." There is a pre- 
ponderance of testimony, therefore, substantiating 
the gold-supply theory. 

Thirty make reply to the second question : "Do 
you believe the general price level will continue 
to advance in the future?" Of this number, 15 
answer in the affirmative without qualification; 
11 believe that prices will continue to go higher, 
though less steadily and not indefinitely; while 4 
predict that prices will remain at their present 
level or decline in the near future. Here, too, the 
weight of testimony is very evidently predictive of 
a continued increase in prices. 

To the investor, the most important of the 
queries propounded is the third, which asked for 
an expression as to the most desirable form of in- 
vestment in a period of rising prices. Of the 26 
making reply to this, 16 specifically recommend 
stocks, 6 specify real estate, 3 short-term bonds or 
notes, and 1 suggests mortgages or bonds. Thus 
22 out of 26 are clear in their choice of invest- 
ments which give the buyer an equity in some- 
thing. 



144 HOW TO INVEST 

The stockholder and the landowner participate 
in the increasing scale of values; the higher the 
level of prices, the more valuable do their hold- 
ings become. The investment of the person who 
holds bonds alone, on the other hand, decreases in 
value, because not only are the rate of interest and 
the principal of the loan fixed and limited, but the 
money standard in which they are payable is con- 
stantly depreciating. It is significant that three 
of the four who favor bonds are careful to specify 
short-term securities, so that the principal involved 
may not be too long subjected to continued contrac- 
tion in buying power. 

Conclusion 

The consensus of opinion of these 32 econo- 
mists would therefore seem to be: 

1. That the gold supply is the basic cause, or at 
least one of the chief causes, of the present high 
price level. 

2. That the present price level is practically 
certain to continue to advance in the future. 

3. In view of the two preceding conclusions, the 
most desirable form of investment is one which 
gives the investor a share in the ownership of a 
property or enterprise, i. e., stocks, real estate, or 
bonds carrying a stock bonus. 



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